Robert Alan Feldman is professor at Tokyo University of Science and management of technology program senior adviser at Morgan Stanley MUFG Securities
The world owes Japan's outgoing Prime Minister Shinzo Abe a big thank-you.
He maintained a prosperous, stable democracy, and helped stabilize Japan and the Asian region in a time of great change. His economic policies, under the big tent called Abenomics, had many successes. But there were also some incompletes -- which will be crucial tests for his successor.
First, the successes. Abe returned Japan to positive growth. In the four years before he returned to office at the end of 2012, real growth per capita was nil. From 2013-2019, it was 1.2%. He defeated deflation. When Abe took office in December 2012, core consumer prices were falling by 0.5% per year; by end-2019, just before COVID-19 set in, they were rising by 0.5%. He did not achieve the 2% inflation target. However, he did achieve full employment, so there is little to criticize.
Abe normalized the dollar-yen exchange rate. When he took office, Japan's currency averaged 84 yen to the dollar, far too strong for the economy. From 2013 to 2020, the yen averaged 109 to the dollar and moved mostly within the range of 105 yen to 117 yen. Abe promoted open trade. Taking a huge political risk, he brought Japan into the Trans-Pacific Partnership negotiations in 2014, despite determined opposition from domestic vested interests, and led the treaty's ratification in December 2016. After the U.S. withdrawal from the TPP, he spearheaded a successful renegotiation of the agreement without the U.S., and secured its ratification in 2018.
Abe promoted foreign tourism vigorously. In 2012, Japan saw 8.4 million tourist arrivals. By easing tourist visa requirements, particularly for Asian nations, Abe brought the number of arrivals 31.9 million in 2019. Another thing he promoted was foreign workers, who now total about 1.7 million, double the number in 2012. Abe also oversaw a rationalization of the system of allowing permanent residence for foreigners, switching to a highly transparent, points-based system.
Abe strengthened corporate governance. First, he took the corporate income tax rate from 39% to 31%, but at the same time strengthened corporate governance rules. Japan introduced a comply-or-explain requirement for appointing at least two outside directors to corporate boards. In 2014, only 21.5% of top tier companies listed on the Tokyo Stock Exchange had two or more such directors; by 2019, the figure was 93.4%. Japan introduced a stewardship code for institutional investors, requiring active oversight of companies, and tightened guidelines on fair mergers and acquisitions in order to better protect minority shareholders and reduce distortions from listed subsidiaries.
Abe strengthened policymaking procedures. The key reform was centralizing appointments of senior ministry officials, rather than leaving promotions to individual ministries, a change which fostered cross-silo policymaking.
Still, there were some incompletes. So, what were they? In some crucial areas, progress was uneven. In the labor market, for instance, Abenomics was hugely successful in raising labor force participation -- of women of all age groups and senior men as well. However, this is a temporary solution -- since the population aged 15 to 75 will shrink from about 92.5 million in 2019 to 78.0 million in 2030. Abenomics sought to shorten working hours, even though hours worked are actually about 5% below the Organisation for Economic Co-operation and Development average -- due to the high share of part-time workers.
On worker productivity, yes, high business investment gave more capital to each worker. Also, Abenomics improved research and development incentives in the tax system. However, government spending on R&D has flatlined at about 3 trillion yen, now about 0.6% of GDP, for the last 15 years. Moreover, labor law revisions fell well short of ending the dualistic labor market. Wage differentials also persist, with compensation per worker at larger companies 48% higher than at medium-sized companies in 2012, but falling only to 44% higher in 2019.
In energy and climate policy, Abenomics enhanced competition in the electric power supply. However, retail power prices remain far higher than in other industrial countries. Abenomics declared a target of 80% reduction of greenhouse gases, but energy plans continue to rely on fossil fuel use that is inconsistent with this target.
Social Security reforms have also been uneven. While Abenomics took some steps to encourage the employment of older workers, these steps fall short of what is needed in a country where men are expected to live about 20 years after retirement age, and women even longer. In medical reforms, Abenomics proposed an increase of medical co-payments for the elderly with higher incomes, from 10% to 20%, but this proposal has stalled. The debate on medical cost-benefit calculations has also stalled.
In agriculture, Abe reduced the monopoly power of the Japan Agricultural Cooperatives system over individual agricultural cooperatives. However, agricultural land laws remain rigid relics of the late 1940s, while the introduction of drones has been hobbled by turf battles among ministries.
What comes next? Few Japanese leaders have accomplished as much in economic policy as Abe did as prime minister. However, the economic challenges for the future remain huge. His successor will have big shoes to fill, and even bigger challenges to face.