Bill Emmott - International Author & Adviser

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Abe´s Style of Raising Japan: Money for Everyone and the Olympics
La Stampa - September 15, 2013

There’s no doubt about it: suddenly Japan feels “hot”, and that is not just a comment about the exceptionally warm weather that greeted me in Tokyo, nor the erupting volcano, Sakurajima, that greeted me in the south-west island of Kyushu. It is a comment on the rush of investors, domestic and international, that this month are crowding into big conferences in Tokyo to pore over Japan’s prospects: there were 2,000 at the one I attended, up from 800 at the same firm’s similar event six months ago. 

Two-and-a-half years back, when the terrible earthquake and tsunami killed 20,000 people in north-east Japan and crippled the notorious Fukushima Dai-Ichi nuclear power plant, foreigners were rushing to leave. Now, they are rushing in, ignoring scare stories about continued radiation leaks at Fukushima (which is anyway more than 200 km from Tokyo), and full of talk that China, Brazil, India and others are yesterday’s fading news: today’s and tomorrow’s news is Japan.

It is all a reflection of a huge burst of economic optimism in Japan that has suddenly replaced years of gloom and resignation about the country’s long stagnation. And, of course, about the vote last weekend in Buenos Aires that led to Tokyo being chosen to host the 2020 Olympic Games, setting up a potential repeat of the city’s hugely successful Olympics in 1964, which in effect announced that “Japan is back” 20 years after its wartime defeat and destruction.

Can it be real, this time? I don’t mean the Olympics vote, which was certainly real, despite the fact that the Chinese state news agency, Xinhua, at first reported mistakenly that Tokyo had lost to Istanbul. “It wasn’t a mistake: it was wishful thinking”, a gleeful retired Japanese diplomat said to me, and he was gleeful because he had been part of the official delegation in Buenos Aires and is also due to play a key role in 2019, when Japan will also be hosting the Rugby World Cup. No, I mean the economic revival, and the idea that, once again, “Japan is back”.

During the more than 20 years since Japan suffered a crash in stock and property markets that was the biggest to be seen anywhere since 1929, there have been many brief periods of optimism, many false dawns. Today’s dawn carries the name of the prime minister who was elected last December in a landslide, Shinzo Abe of the right-wing Liberal Democratic Party, and is known as “Abenomics”. But it takes more than a slogan to reverse years of decline.

Foreign visitors to Tokyo have often, during those two decades of stagnation, remarked that Japan looks remarkably prosperous despite its troubles, full of impressive new buildings and crowded shops. Yet Tokyo, and the view from luxury hotels and taxis, offers a misleading impression.

The facts are clear: during the 15 years from 1997-2012, Japan’s GDP per head of population rose by just 8.1% in total, compared with rises of 15-25% in France, the US, Germany and Britain (in that ascending order), a rise of 65% in neighbouring South Korea, and a colossal rise of 266% in Japan’s historic rival, China. Only one of the “G7” rich industrial nations performed worst than Japan on this measure, and I am sorry to say that it was Italy (1.4% total growth in GDP per head in 1997-2012).

If you go out of Tokyo to Japan’s second city, Osaka, you can find real sights of poverty and homelessness. Once famed for its equality, with 80% of Japanese telling opinion polls they were “middle class”, Japan has now become much more unequal, with poverty rising and nearly 40% of the labour force working on low-wage, precarious short-term contracts. And like in Italy and Germany, Japan’s demographic prospects are poor: its 120 million-strong population is ageing fast, and on current trends is expected to shrink to something like 80-90 million by the end of the century.

So why the optimism? The diagnosis offered by “Abenomics” has the merit of being simple, and his political situation has the merit of being extremely strong, much stronger than that of any Japanese prime minister for the past 30 years. So the chance of him succeeding in implementing his plan is seen as being higher than ever before during the country’s long stagnation.

To an Englishman, it feels rather like the period for our own Margaret Thatcher, after she had won the Falklands War to drive out the Argentine invaders in 1982 and then won a huge majority in the 1983 general election. After three weak years, pledging to end Britain’s long decline, she at last had a chance to really do something.

Mr Abe is rather different from Mrs Thatcher. She, as a woman and in her philosophy, was an outsider in her own party and to the British political establishment. Mr Abe is the consummate Japanese political insider, grandson of the prime minister who won the contest to host the 1964 Olympics, son of a foreign minister of the 1980s. And that is where the interesting questions about Abenomics and Japan’s latest new dawn begin.

The diagnosis of Abenomics is that Japan has suffered from falling prices, or deflation, ever since the mid-1990s, which has depressed household consumption and caused companies to hoard cash rather than spending it on new equipment or higher wages. To cure this deflation, Doctor Abe prescribes a prolonged period of money-printing by the Bank of Japan (what is these days known as “quantitative easing”) and liberalising reforms to encourage companies to invest and expand.

For the money-printing, he brought in a new governor for the central bank, and has already seen a helpful by-product of the monetary expansion in the form of a 25% devaluation of the Japanese currency, the yen. But what everyone is now waiting for, and rushing to Tokyo to try to guage the prospects for, are the liberalising reforms.

Japan’s underlying economic problem is just like that of Italy. The country is full of self-imposed obstacles to innovation, to new companies, to new employment, to new investment of all kinds. Those obstacles have been imposed, or else reinforced, by the people and companies that benefited from the old ways of doing things: from cartels, from regional electricity monopolies, from strict regulations against new entrants, from labour laws that made it almost impossible to dismiss an employee on a permanent contract and so could only be circumvented by a precarious contract.

Turning deflation into inflation, which is what Mr Abe and his new central bank governor promise to do, will not remove those obstacles. In fact, if those obstacles remain in place, and if new jobs and higher wages are not created, inflation might make people poorer, not richer. It also could lead to a crisis in Japan’s public finances, since its vast government debt makes even Italy’s look reasonable, and it is vulnerable to rising interest rates. So the liberalising reforms are the vital part of Abenomics.

The trouble is that this is not truly a technical or simply economic matter. It is all about politics. The problem of all these obstacles is a problem of how interest groups become entrenched in our democracies, by becoming powerful lobbies, by providing campaign finance, by providing votes. And the world champion at exploiting that interest-group politics in the past was Mr Abe’s own Liberal Democratic Party, which governed Japan for half a century.

Britain’s Mrs Thatcher chose to confront interest groups, but they were chiefly outside her own party: coal miners and other trade unions. Mr Abe has to confront them chiefly inside his own party and its backers.  That confrontation will have to begin this autumn, for Mr Abe’s political strength is currently at its peak, thanks to successful elections, the Olympics victory, and six months of good economic data.

There is a case for optimism. It is that just as it took the right-wing President Richard Nixon to reverse US policy on Communist China in the 1970s, so perhaps only an interest-group politician can confront interest-group politics. And the Olympics could play a part, by providing a national goal, just seven years hence, that could help force opponents to accept change and reform.

Yet the resistance is strong and deep, just as it is in Italy. I have seen too many false dawns, too many bold promises of reform that were unfulfilled, and so despite being an admirer, even a lover, of Japan, I will wait to see the proof that it is really happening. I do want to give Mr Abe a gold medal. But I will wait till he wins the contest before putting the medal around his neck.

 

 


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