The Genius of Abenomics Emerged Long After Abe
(Bloomberg Opinion) -- And the winner of the Japanese leadership contest is... Shinzo Abe. Political expediency and the economics of the pandemic era mean any major departure from the former premier's eponymous policies is becoming increasingly unlikely. Yoshihide Suga, whose year in office was an asterisk to Abe, relinquished the reins last month, and the race is on to find his successor.
While “Abenomics” means different things to different people, the main prongs have always been fiscal expansion, monetary loosening to dispel the threat of deflation, and cutting down the red tape that’s perceived to stymie business. Japan's stop-start recovery makes it almost inconceivable that fiscal stimulus will end anytime soon. The three contenders to lead the ruling Liberal Democratic Party — Taro Kono, Sanae Takaichi and Fumio Kishida — all favor some form of further budget largesse, not least because a general election is also approaching. Any meaningful reduction in monetary accommodation is even less realistic. Near-zero rates and quantitative easing have been part of Japan’s toolkit for decades, long before they were wheeled out in the West to fight the global financial crisis and the pandemic recession.
A political horse race is a rarity for the LDP. Usually contests have been settled in smoke-filled rooms dominated by a few faction chiefs. But these days Kono, Takaichi and Kishida are pitching their platforms directly to television and social media — not unlike candidates in a major party primary in the U.S. That means a lot of attention has been devoted to whether, or by how much, the candidates differ from the approach of Abe, Japan's longest serving premier, who has dominated the party in a way few of his predecessors did. Abe was prime minister for a year until resigning in 2007. He returned to lead the LDP back into office in 2012 after three years in opposition, pledging a bold program to reflate the economy.
Abe, who stood down because of ill-health last year, had varying degrees of success. While he smartly flexed fiscal muscle to crank up growth, two consumption tax increases amounted to an own goal. The monetary agenda was left to the Bank of Japan, whose governor, Haruhiko Kuroda, was appointed twice by Abe. Kuroda’s early years in the job were characterized by a dramatic expansion of the central bank’s balance sheet in an effort to meet the inflation target of 2% quickly. The BOJ made some progress toward that end — for a few years there, it looked like the target was within reach, before an oil-price collapse halted momentum. If a reflationary approach was warranted in the pre-pandemic era, why abandon it now, in the throes of a crisis?
Global economic growth this year will be 6%, the International Monetary Fund reckons. But that impressive headline figure belies some important differences between countries and regions. Even within Japan, the upswing has been inconsistent, with the second quarter narrowly averting a double-dip recession. In this environment, reflation policies aren’t something you walk away from. Extra budgets and pork barrel are in the DNA of the LDP, which has led Japan for most of the post-World War II period. Fiscal juicing is also firmly in the mainstream of the global policy approach. Barely a month goes by without agencies like the IMF reminding us that withdrawing support prematurely is a no-no.
Don't expect significant changes to monetary policy, either. A fundamental reappraisal of interest rates will probably have to wait for Kuroda’s second term to end. If the new premier can stay on that long, he or she will get to appoint a successor to the central banker in 2023.
While the ability to achieve 2% inflation has been questioned, its hard to see how any alternative regime helps Japan achieve what the contenders for premier say they want: growth. Takaichi is committed to 2% inflation, as is Kishida. Kono waffles a bit on this issue. He is critical of profits made by firms during the easy-money era and has expressed doubt that the inflation target is achievable. He also prefers to leave policy mainly to the BOJ. (It's possible that, should the BOJ plan an exit from its current stance, there would be less resistance under Kono, though that point appears distant.)
The next prime minister could also fiddle with the 2013 compact that outlines how the BOJ and government can work together to banish deflation and pursue economic development. But that is a second- or even third-tier issue relative to sustaining the recovery, keeping up progress on vaccinations and figuring how much and what kind of reopening Japan can enjoy.
Critics like to say that nothing changes in Japan, and that the past three decades have been “lost.” The truth is much more mundane. There simply aren’t many practical alternatives to Abe’s underlying path, and whoever comes next would be well-advised to follow it.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously he was executive editor of Bloomberg News for global economics, and has led teams in Asia, Europe and North America.
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