October 23, 2017 12:22 pm JST
William Pesek

Abe must not waste storming victory

Prime minister should use election win to reform Japan's economy

Prime Minister Shinzo Abe now needs to go further than reflationary policy to unleash a regulatory big bang. © Reuters

Metaphors abounded Sunday as Japanese voters braved heavy rain and a fast-approaching typhoon to re-elect Shinzo Abe's government. The prime minister's landslide literally coincided with mudslide alerts ringing out from mobile phones around the nation.

But now, with the typhoon heading out to sea on Monday, the forecasts foremost on the minds of most voters are of the economic variety.

Abe's economy has been blowing along nicely these last six quarters, enjoying a global-growth tailwind and the longest run of domestic growth in 11 years. Gross Domestic Product was up 2.5% year-on-year in the second quarter. Unemployment is at a 23-year low, while the Nikkei Stock Average is trading near the highest levels since the late 1990s. There is a problem, though. The benefits are not really reaching the average Japanese worker. Real wages grew just 0.1% in August year-on-year, following a 1.1% decline in July. It is a clear sign growth is not translating into the higher wages needed to boost demand, inflation and make Abenomics a broad success.

To date, Abe has relied too much on monetary easing and been too slow to unleash a regulatory big bang. His pledges to modernize labor markets, catalyze a startup boom, incentivize innovation and empower women got sidetracked by plans to amend the pacifist constitution and tighten security. Abe has been surprisingly timid about taking on vested interests, favoring monetary stimulus over angering Liberal Democratic Party support bases.

On Sunday, voters handed Abe a chance at a reboot. Here are five ways Abe's LDP can address the future headwinds bearing down on the economy.

Squeeze Japan Inc.: Abe should borrow a few ideas from Yuriko Koike's Party of Hope, even if it fared rather hopelessly on Sunday. A case in point: tax excessive cash reserves better used to increase wages or investing in new industries. By relying more on huge Bank of Japan liquidity injections than reductions in red tape, Abenomics is more about welfare for companies than raising living standards. The resulting surge in profits and the Nikkei index's return to 20-year highs is not getting Tokyo close to its 2% inflation goal. Core consumer prices, excluding fresh food, rose by just 0.7% in August from a year earlier. Nor have Abe's efforts to tighten corporate governance headed off a parade of unsightly scandals -- Kobe Steel's dodgy data, Nissan Motor's quality-control debacle, Takata's potentially deadly airbags, Toshiba's accounting shenanigans, Tokyo Electric Power's opaque radiation cleanup in Fukushima. Properly deployed, Japan Inc's roughly 300 trillion yen ($2.7 trillion) cash pile would be a gamechanger for boosting wage and inflation.

Resurrect the TPP: Abe's huge investment in Donald Trump is backfiring. Since Abe's sprint to New York's Trump Tower on Nov. 17, no world leader did more to accommodate the "America First" president. Abe said Japan's government will work with the U.S. to create 700,000 U.S. jobs, but it did not stop Trump from bashing the weak yen or Toyota Motor building a new factory in Mexico. And Trump still pulled out of a Trans-Pacific Partnership vital to lowering Japan's trade barriers and taking on interests from agriculture to fisheries. Abe should lead the charge not just to preserve the pact, but expand it. He could lobby to pull South Korea, Indonesia and other Southeast Asian economies into the deal. That would lower Japan's firewalls to outside forces and reinvigorate Tokyo's role as a leadership alternative to China.

Bet big on renewables: Another Koike idea worth co-opting is scrapping the nuclear reactors Japanese came to fear after the giant March 2011 earthquake. Abe should turn the current suspension of operations at Japan's 50 reactors into a permanent shutdown. His LDP is too wedded to the "nuclear village" of politicians, bureaucrats, local governments and pro-reactor academics to see the renewable-energy boom that is Japan's for the taking. Nearly three billion Chinese, Indians and Indonesians risk choking on rapid growth. Given Japan's proven prowess in energy conservation, battery technology and lack of ready energy deposits, few places are better equipped to invent and market replacements for fossil fuels, creating scores of high-paying jobs. When visionaries like SoftBank Group's Masayoshi Son have stepped forward with big plans to invest in wind and solar, though, bureaucrats limit access to national power grids. With tax incentives and fewer restrictions, Abe can launch an energy startup boom that significantly brightens Japan's prospects.

A "womenomics" boom: For all the hype about making the other half of a 127 million-person population "shine," the gender gap worsened on Abe's watch. Japan ranks 111th on the World Economic Forum's equality index compared with 98th place in 2011. Abe should reinstate an earlier pledge to ensure women hold 30% of leadership positions -- and ensure more women get regular work with full pay. While the female labor participation rate rose to 66%, women account for two-thirds of "non-regular" workers, typically temporary and part-time staff paid less and with fewer benefits. Role models matter, too. Here, Koike's milestone as Tokyo's first female governor is important. But just two of Abe's 19 cabinet members are female. Nor has Abe entrusted a truly global portfolio to a woman -- foreign affairs, finance or chief cabinet secretary. Goldman Sachs estimates Japan's gross domestic product would get a 15% boost if more women worked, boosting productivity and offsetting an aging workforce.

Mind the demographics: Abe vows to "create a Japan where people can have dreams in the future." Odd, though, how little talk there is about the nightmarish demographics imperiling the future. In a recent report, London-based International Institute for Strategic Studies warns of a "looming crisis" as the population shrinks by about 30% by 2060. The challenge is balancing the world's largest debt burden with a shrinking workforce and a static birthrate. Demographic dynamics also support continued deflation as the ranks of older consumers who buy less outnumber younger ones. Along with better utilizing women, Abe should push to increase immigration and champion innovative solutions to fill staffing voids. Why not at least follow Singapore's lead and import specific talent? That means welcoming more biochemists, engineers, entrepreneurs, health-care givers, lawyers, programmers and venture capitalists.

On all of these steps, Abe must display a level of courage against vested interests and LDP powerbrokers he hasn't yet shown. But he can push back, citing a fresh infusion of political capital from voters craving a break with the stimulus-heavy growth model of the past. A bit more audacity and creativity at the tiller would give Abenomics the tailwind it desperately needs.

William Pesek is a Tokyo-based journalist and author of "Japanization: What the World Can Learn from Japan's Lost Decades." He has written for Bloomberg and Barron's.

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