Sticking to Shock and Awe

When Shinzo Abe, the prime minister of Japan, returned from one of the easiest tasks in his professional life – selling Tokyo as a better Olympics destination than a recession ravaged Madrid and a divided Istanbul – he received what the Romans would have called a triumph. In the lobby of Fukuoka Airport he made a bellicose statement of intent for Team Japan in front of a sea of photographers and journalists. The images of celebration from the Japanese camp in Buenos Aires were streamed across the nation and commentators heaped praise on the magnificent speech by the prime minister, soothing the IOC’s concerns over the minuscule risks of a deactivated nuclear reactor almost 200 miles away. It is politically opportune for Shinzo Abe to have bagged this prestigious event for Japan; many in the know had predicted that Tokyo was the natural choice for a committee that had picked a slipshod Rio de Janiero last time around. The politically alert Abe ditched the G20 summit, swooping in to seal the deal and claim the credit.

Japan having snapped up the Olympics in 2020 is yet another sign of the country beginning to reassert itself on the international stage. Having gone through the shame of irrelevance for 2 decades, the Japanese public seem to have elected what they view as a Japanese Thatcher or Reagan: the leader who can revitalise both their economic strength and their world standing. Abe came to office in December last year announcing drastic fiscal and monetary stimulus alongside supply-side reforms that were designed to blast the economy out of its 2 decade long period of cryogenic stasis. Since this was Japan, the world’s press largely ignored the dull political happenings of a country that had had 7 prime ministers in as many years, assuming that eye-catching statements like this one would fade away into commissions and reviews never to be heard from again. The last thing they expected however, was for Abe to, in effect, fire the governor of the Bank of Japan, place a more dovish man in his stead and spend more than 10 trillion yen on fiscal stimulus, all within 3 months of him assuming office.

In Japan, the land of sleeping politics, these developments were nothing short of seismic. Abe’s shock and awe approach in terms of policy has yielded him magnificent results politically, with him being the first prime minister to secure both houses of the Diet (Japan’s parliament) in 6 years. His success is so profound that even American journalists and economists have started to take notice. Whilst a chipper Paul Krugman article espousing the benefits of no holds barred stimulus was expected, what was not was Abe getting the unreserved endorsement of the IMF who forecast that Abe’s plan would contribute to economic growth by as much as 3%. For a country that was used to the management of decline for 2 decades, Abe is the man who made the sun rise again.

However, the oddest thing about Japan’s recovery is that it is so lukewarm. For every strand of good news there seems to be another where the economy has performed below expectations: GDP data improves then exports shrink, unemployment is falling, but wages are still stagnant. These anxieties have crystallised over the debate surrounding the introduction of a higher rate of sales tax to pay for the stimulus. Much like the forward guidance experiment taking place in UK monetary policy at the moment, good news for the economy means we are getting closer to the time when the party has to end. This is adding an unpleasant amount of uncertainty to Japanese politics, with every statement by the prime minister or cabinet being scrutinised for hints on when the sales tax will be announced.

What’s more there are no George Osborne attempts at false modesty at play in Shinzo Abe’s countenance. His lecture to the Centre for Strategic and International Studies was entitled “Japan is Back” and he has described his own policies as a “win-win” for all of Japan. Yet there are fears his confidence is misplaced; the impressive recovery (almost 4% annualised GDP growth is nothing to be ashamed of) has begun to show signs of bubbles. The Nikkei has almost doubled in a year, aided by the Bank of Japan’s zero limit policy on quantitative easing and this seems to be behind the explosion in consumer spending over the same period, given that wages have remained fairly stagnant since Abe took power. What’s more, it is doubtful if this explosion in stock prices and spending has fed through to the real economy. When looked at it from that angle there is little evidence that this recovery is yet strong enough to survive outside of government life support, hence the fearful tone in the words of economists who mention the planned sales tax.

The fear is that the style that is favoured by Abe draws more from Reagan than from Keynes. Certainly several key totems of a Reaganite approach are present in the politics of Abe: defence has been a primary benefactor of the surge in government spending and Abe’s laid back attitude to soaring deficits is very much a hallmark of a Reagan-centred policy mindset. Abe’s rhetoric is quite similar to Reagan’s as well, Abe often uses the idea that Japan’s success is rooted in the values that had always been there, and his policies simply rediscovered it, which was one of Reagan’s favourite topics.

Whilst this does bridge the gap nicely between arrogance and pessimism, it shows a fatal complacency and disregard for the long term ramifications of Abenomics. Whilst the “morning in America” boom in the 80’s brought growth, it saddled the economy with an aversion to balanced budgets in favour of low taxes that wasn’t fixed until the tail end of Clinton’s presidency. In much the same way, the determination to revive the economy with stimulus in Japan could distract the government from its stated mission to cut down the deficit and reorientate the economy away from subsidy and towards exports and trade.

With control over the upper and lower house of the Diet, the media distracted by the Olympics and Abe’s personal ratings higher than ever, it is time for Abe to fire the much touted “third arrow” of economic reform and supply side policies straight at the target. Bills have been placed before the Diet, but grumblings within Abe’s own Liberal Democratic Party threaten to derail them. The influence of such a popular prime minister should crush all opposition, if he chose to wield his electoral mandate. Whilst Japan has joined the trade centred Trans-Pacific Partnership, that alone will not prompt the much need squeeze and shakeout that the arthritic Japanese economy needs to keep up its impressive trend of growth. Abe has the opportunity to be remembered as the man who not only made the sun rise again for Japan, but also the man who held it up high for all the world to see.