Japan’s leader has ‘three golden years’ to effect big change, suddenly with no kingmaker breathing down his neck
TOKYO — The post-Shinzo Abe era is shaping up to be one of the most unpredictable and impactful Japan has seen in generations, both for economic and security matters.
In his 284 days as prime minister, Fumio Kishida has so far cut a cautious figure. A protege of the late Abe, who was assassinated on July 8, Kishida tried to pull off a near-impossible balancing act.
On the one hand, he’s been keen to take his “new capitalism” plan out for a ride to increase wages and competitiveness. On the other, Kishida had to operate with larger-than-life kingmaker Abe looking over his shoulder at every turn.
It seemed awkward for Kishida to attempt to stimulate innovation, revamp a byzantine initial public offering process, make life easier for multinational companies to move to Tokyo and empower women. The implication was that Abenomics, Abe’s big claim to a bold legacy, had flopped. So, Kishida had to soft-pedal reform moves.
The same was true for military and security matters. Until now, Kishida moved carefully on any decision the Abe faction might think reflects poorly on its own legacy. Looking ahead, there is much to be done.
Economist Hiromu Uezato at Morgan Stanley MUFG is on the watch out for Cabinet reshuffles or reappointments of top party officials. Along with supplementary budgets, Uezato says, urgent needs include dealing with power shortages amid record summer heat, defense-related issues and Japan’s latest wave of Covid-19 infections.
‘Three golden years’
Abe was assassinated by a crazed gunman on July 8. The sympathy over Abe’s violent death resulted in greater support for the Liberal Democratic Party (LDP), as evidenced by its picking up more seats than expected at the July 10 parliamentary elections two days after Abe’s death, says analyst David Boling at Eurasia Group.
That works for Kishida, who now has his own mandate – and the post-Abe chance – to be his own man.
“With this victory, Prime Minister Kishida now has ‘the golden three years’ in which he does not need to hold any national election. This puts him in a position to execute his policy agenda,” says political scientist Kiyoteru Tsutsui at Stanford University.
In the economic realm, Tsutsui adds, he “no longer has to go out of his way to defend Abenomics and emphasize that his economic policy is an extension of Abe’s.”
Does that mean Kishida might pivot to better relations with China and/or Korea? Only Kishida knows, Tsutsui says, but the potential is now greater than it was 10 days ago.
Even so, political observers are buzzing that Kishida has fresh momentum to hike defense spending in ways Abe couldn’t. Abe was never able to boost military expenditures to 2% of gross domestic product (GDP), as per longstanding LDP goals.
Odds are Kishida’s next defense budget will be about US$45 billion, an 11% jump from last year. This increase will surely raise hackles in Beijing and Seoul. China especially, at a moment with President Xi Jinping is raising exponentially his nation’s military game.
Kishida also may push ahead with Abe’s controversial plan to revise Japan’s pacifist constitution and perhaps have a greater chance of success.
Abe arguably had too much family baggage to alter Article 9 of the constitution, which bars Japan from fielding a conventional offensive military. Removing the shackles right-wingers believe were imposed unfairly by US occupation officials after World War II often smacked of family business for Abe.
Nobusuke Kishi, Abe’s beloved grandfather, was a member of the wartime cabinet of General Hideki Tojo and was accused of war crimes. The US let Kishi off the hook. In 1957, he rose to the nation’s top job. One of Kishi’s claims to fame was securing the 1964 Olympics. This, in part, explains why Abe’s Japan bet so big on staging the 2020 Games.
One priority that made Abe so polarizing was his revisionist worldview. In both his stints as prime minister — from 2006 to 2007 and 2012 to 2020 — Abe encouraged efforts to downplay Imperial Japan’s past aggression. The centerpiece: revising the war-renouncing Article 9 section of the General Douglas MacArthur constitution.
Abe failed. And ironically it marred his broader reputation as an epochal economic change agent. Simply put, Abe’s neglect of structural retooling in favor of constitutional revision cost him a lasting economic legacy.
Abenomics failures
In the early years of his second premiership, Abe’s handpicked Bank of Japan leader Haruhiko Kuroda pumped trillions of dollars of stimulus into the economy. The resulting decline of the yen powered an export-led growth boom. Chalk that up as a win.
Yet the lack of reforms to increase dynamism and competitiveness cost Japan the higher wage-and-consumption cycle Abe had promised.
Nor did Abe, sadly, make progress on a range of “Japan’s gathering challenges, especially the demographic timebomb of a rapidly aging society” and the climate crisis, notes Jeff Kingston, head of Asian studies at Temple University’s Tokyo campus.
That made Japan easy prey for fallout from Covid-19 recessions around the globe. It also leaves Kishida to pick up the pieces as global inflation further upends the weak yen policy.
Here, Abe’s biographer Tobias Harris, author of The Iconoclast, argues that Abe’s greatest achievement might turn out to be Kishida’s premiership. Kishida is uncontroversial enough to “end up doing the bidding of Shinzo Abe” without the noise or backlash.
Take the economy. For 20 years now, Tokyo has been struggling to end deflation, most assertively on Kuroda’s watch since 2013. Yet Abe and the BOJ didn’t end deflation – Vladimir Putin did. The inflation Japan is now getting is the unwelcome kind: importing it via elevated oil and food prices with a yen that’s lost 20% of its value so far this year.
The BOJ can’t raise interest rates. That could crash Japanese markets, triggering extreme turbulence in global bonds and equities. That puts the onus on Kishida to safeguard growth and strengthen supply chains. Equally important, Kishida needs to resurrect the economic reform process.
Here, it’s important that Kishida heed lessons from the Abe era. One is that real strength in Asia isn’t just about fighter jets and aircraft carriers. The tech “unicorn” arms race is becoming equally important.
Japan squandered the last decade toying with 1980s-style “trickle-down economics” rather than reanimating innovative spirits. During that time, India, Indonesia and South Korea blew the doors off Japan in minting $1 billion-plus valuation startups.
Then there is the giant next door. While Tokyo prioritized yen devaluation, China invested trillions of dollars in economic software to own the future of aerospace, artificial intelligence, biotechnology, green infrastructure, logistics, renewable energy, self-driving vehicles, semiconductors and other tech-driven realms.
Xi’s 2025 vision includes building a “Silicon Valley East” in southern China. This Greater Bay Area groups Hong Kong and Macau with Shenzhen and eight other municipalities all destined to become powers of their own: Guangzhou, Zhuhai, Foshan, Huizhou, Dongguan, Zhongshan, Jiangmen and Zhaoqing.
For all the accolades being floated Abe’s way in a sea of obituaries, his tenure made it easier for China’s economy to pull further ahead. That’s what happened when Japan spent a decade fiddling with monetary steroids while Xi built real economic muscle.
Kill bureaucracy, enliven innovation
Kishida could close this gap by moving to reawaken Japan Inc’s innovation, a force that once turned the world’s attention Tokyo’s way.
One promising Kishida proposal: tap the Government Pension Investment Fund’s $1.45 trillion of firepower to act like a giant venture capital pool. Doing so might irk old-school libertarians but Japan’s lackluster VC industry desperately needs a jolt.
One damning postscript on Abenomics is that Japan’s ranking in the World Bank’s “Ease of Doing Business” worsened to 29th by 2020 from 20th in 2012. These pre-existing conditions, born of years of chronic complacency, left Japan vulnerable both to pandemic-related recessions and today’s inflation outbreak.
Hence the big issue is getting the regulatory “big bang” Japan has needed for two decades to increase economic efficiency. Priorities include increasing transparency and smashing fiefdoms within Tokyo’s notoriously hidebound ministries.
Kishida could start by cutting red tape, using tax and regulatory tweaks to catalyze a startup boom and boost wages and mandating greater wage equality for women.
It would have to be done carefully. Indeed, the more Kishida pushes for economic upgrades, the more his LDP must reckon with Abe’s failure to do so in nearly nine years spread across two premierships.
As economist Carlos Casanova at Union Bancaire Privée points out, Kishida has pledged to “reduce income disparity, saying that the benefits of growth shouldn’t belong to a limited group of people.” Yet, he adds, this “perception stems from years of ultra-accommodative monetary policies prescribed under the first arrow of Abenomics.”
Casanova notes that given the inflation trajectory and the weak yen, “the likelihood that Bank of Japan might introduce changes to its negative interest rate policy and yield-curve control has certainly increased.”
Again, this would add to pressure on Kishida’s party to put big structural reform wins on the scoreboard.
Enter Kishinomics
One could argue all this presents quite the buying opportunity. As Nicholas Smith, strategist at CLSA Japan, puts it: “the Japanese stock market has gone from bubble to anti-bubble. It’s all the easier to find undiscovered gems in the value space because the sell-side’s all but given up covering them.”
Smith says 76% of Topix index stocks now trading below book value have two analysts or fewer currently analyzing their prospects. “That’s not a small number of companies,” he notes. Today, 53% of the 2,170 companies on Topix trade below book. That, Smith argues, explains why activist and private equity “wolfpacks are circling Japan’s value space.”
An area of particular focus is Japan’s nascent digitalization push. Even after its Covid-19 work-from-home edicts, Japan remains a stubbornly paper-based political and corporate culture. The LDP is working on a three-year overhaul – roughly 40,000 directives – to alter norms for online services, written documents and face-to-face meetings.
Kishida should greatly accelerate that timeline.
Kishida also is likely to use the LDP’s new election mandate to pivot toward defense policy. This might owe much to public concern over China’s increasingly assertive behavior regionally and anger over Ukraine.
“Although a splintering right-wing gives the traditionally more dovish prime minister more room to maneuver, the broader course towards higher defense spending seems set, a reflection of how public attitudes have shifted following Russia’s invasion of Ukraine,” says economist Stefan Angrick at Moody’s Analytics.
Constitution revision is a bigger ask from Japan’s 126 million people. Yet last week’s strong election performance “could catalyze Kishida to push for Abe’s unfulfilled goal of amending Japan’s constitution to allow for a stronger role for the military,” says analyst James Brady at advisory firm Teneo.
Temple’s Kingston says voters don’t regard constitutional revision as a priority. That’s why, he adds, Kishida’s immediate priority is “bread-and-butter issues such as how to help households cope with inflation.”
But, Kingston concludes, “Abe’s death, and the fact that Kishida won’t face elections again until 2025, clearly offer an opportunity for him to realize the dream.”
Handled undiplomatically, the fallout could be a nightmare in Northeast Asia, where unfinished business from the 1930s and 1940s often makes warmer relations today between Tokyo, Beijing and Seoul a non-starter.
Could a moderate with less nationalistic baggage than Abe break the cycle? If Kishida can’t, it’s hard to think of anyone in Tokyo’s political orbit who can.
Asia Times