Hard as it might be to imagine now, Shinzo Abe’s departure from the prime minister’s office could actually be great news for Japan’s underperforming economy.
This will sound anathema to investors rediscovering Japan since Abe returned to power in December 2012. His encore surprised many of us who covered his first, largely forgettable turn as leader from 2006 to 2007.
It was after Junichiro Koizumi stepped down from five years of strengthening the banking system, cutting public works spending and privatizing Japan Post, which ran the world’s biggest savings bank.
Back then, the hope was that Abe would stay the structural reform course to defeat deflation once and for all. He did the opposite.
Abe threw Koizumi’s upgrades into a drawer and focused on pet projects, most pertaining to amending the postwar constitution for national security purposes. Then, poof, he was gone within a year, blaming chronic ulcerative colitis.
It was surprising, then, that he returned to power five years later on an economic reform platform – one part Ronald Reagan, one part Margaret Thatcher.
“Abenomics” looked and sounded grand. The new government would fire three arrows – monetary easing, fiscal loosening and deregulation – at a “deflationary mindset” decades in the making. They turned out to be more like Nerf darts.
The first – epic Bank of Japan easing – went aloft with the most success. Japan had been experimenting with zero interest rates since 1999 and quantitative easing since 2001. In March 2013, though, Abe brought in a new BOJ governor, the well-known and widely respected Haruhiko Kuroda, to turbocharge the process.
Kuroda did not disappoint, firing the BOJ’s monetary “bazooka” in all directions. The yen fell 30% in short order, cheering exporters and generating record corporate profits. In 2013 alone, the Nikkei 225 Stock Average surged 57%.
Arrow No 1 was quite the success. And just as Japan’s earlier QE policies inspired copycats from Washington to Frankfurt to London, particularly amid the 2008 “Lehman shock,” Kurodanomics prompted the Federal Reserve, European Central and Bank of England to throw monetary caution to the wind.
Yet the deployment of arrows No 2 and No 3 hit big snags. Rather than open the government’s wallet assertively, Abe’s Liberal Democratic Party thought 2014 seemed a good time to raise sales taxes to 8% from 5%. The resulting brief recession proved otherwise.
Abe’s real misstep, though, was leaving arrow three – supply-side upgrades – largely in the quiver. In 2012, Abe laid out a series of moves to curb bureaucracy, loosen labor markets, support a startup boom and empower women.
He mostly took a series of half steps, where he actually did, that made little difference.
As such, Japan Inc CEOs failed to fatten paychecks appreciably, as hoped. Team Abe made a bet that aggressive BOJ easing alone would be enough to kick off a virtuous cycle of wage gains that would in turn boost consumption and eradicate deflation.
Growth did return on Abe’s watch. In fact, Japan was enjoying its longest expansion since the 1980s until October when Abe’s party again hiked sale taxes. That increase to 10% sent growth in the October-December quarter plunging 7.3%.
It left Japan on a remarkably weak footing for the Covid-19 crisis that would wreck Japan’s 2020 – and ostensibly Abe’s economic legacy.
In reality, it was Abe’s lack of success in retooling Japan’s economy that left if so susceptible to fallout from the pandemic. If Abe had done more to increase wages, productivity and competitiveness when the economic sun was shining, Japan might not have toppled over so quickly.
Here’s why Abe leaving the political scene isn’t the disaster punters rushing to sell Nikkei stocks think. Abe, remember, had three huge advantages no predecessor did.
He had an economic plan the public largely supported.
He had buoyant approval ratings, early on, to get those changes through parliament.
And, as Japan’s longest-serving prime minister, Abe had more than enough time to see things through.
That Abe largely whiffed, with all this going for him, makes his departure a neutral factor at worst for markets. After all, deflationary forces are at present reasserting themselves.
To be sure, Abe has had reform wins. Case in point: implementing a UK-like stewardship code of corporate conduct. Ditto for giving Japanese shareholders – long a reticent, patient bunch – greater voice in decisions.
Tokyo also encouraged boards to add more outside directors and women.
Abe helped save the Trans-Pacific Partnership after Trump pulled out. He also signed a giant free-trade deal with Europe and began negotiations with the UK.
And, for better or worse, Abe hired the man who’s taken QE to almost thermonuclear levels, inspiring central banking peers everywhere. Kurodanomics pioneered the policies Fed Chairman Jerome Powell is now employing to avert a US depression.
It is the forerunner of policies the ECB is employing to stabilize euro-zone economies. And Kuroda isn’t going anywhere.
It’s an open and live question who might replace Abe. None of the usual suspects has particularly well documented economic policies. Neither former defense minister Shigeru Ishiba nor former foreign minister Fumio Kishida nor current defense minister Taro Kono nor chief cabinet secretary Yoshihide Suga is known to have strong economic views.
But after nearly eight years of Abe 2.0, it’s clear that new leadership is needed to refocus Tokyo on the dire need for a bold reboot. It’s clear a new economic team is needed to revitalize the reform process – one as far away from Finance Minister Taro Aso as possible.
It’s clear that only a shift in leadership can focus Tokyo on the need to treat the causes of Japan’s 20-year funk, not just the symptoms.
Abe’s tenure has been 90% economic symptom management, 10% addressing the reasons for the lack of confidence households and businesses have in the future. And that’s being kind.
Kurodanomics is sure to live on, but aggressive monetary easing is no cure for a rigid economic system out of step in the age of China.
Japan suffers from the economic bigotry of low expectations. Just by talking the talk of Reagan and Thatcher, Abe won over the Davos crowd and reaped loads of applause from the foreign media. But the Covid reckoning exposed the sprawling gulf between rhetoric and accomplishment.
Cry for Abe’s departure if you wish. But anyone who thinks Japan is losing a true reformer has been listening to the prime minister’s spin, not watching his actions. Or lack thereof, more to the point.