Articles:
Abe´s Style of Raising Japan: Money for Everyone and the Olympics

There’s no doubt about it: suddenly Japan
feels “hot”, and that is not just a comment about the exceptionally warm weather
that greeted me in Tokyo, nor the erupting volcano, Sakurajima, that greeted me
in the south-west island of Kyushu. It is a comment on the rush of investors,
domestic and international, that this month are crowding into big conferences
in Tokyo to pore over Japan’s prospects: there were 2,000 at the one I
attended, up from 800 at the same firm’s similar event six months ago. 

Two-and-a-half
years back, when the terrible earthquake and tsunami killed 20,000 people in
north-east Japan and crippled the notorious Fukushima Dai-Ichi nuclear power
plant, foreigners were rushing to leave. Now, they are rushing in, ignoring
scare stories about continued radiation leaks at Fukushima (which is anyway
more than 200 km from Tokyo), and full of talk that China, Brazil, India and
others are yesterday’s fading news: today’s and tomorrow’s news is Japan.

It is
all a reflection of a huge burst of economic optimism in Japan that has
suddenly replaced years of gloom and resignation about the country’s long
stagnation. And, of course, about the vote last weekend in Buenos Aires that
led to Tokyo being chosen to host the 2020 Olympic Games, setting up a
potential repeat of the city’s hugely successful Olympics in 1964, which in
effect announced that “Japan is back” 20 years after its wartime defeat and
destruction.

Can
it be real, this time? I don’t mean the Olympics vote, which was certainly
real, despite the fact that the Chinese state news agency, Xinhua, at first
reported mistakenly that Tokyo had lost to Istanbul. “It wasn’t a mistake: it
was wishful thinking”, a gleeful retired Japanese diplomat said to me, and he
was gleeful because he had been part of the official delegation in Buenos Aires
and is also due to play a key role in 2019, when Japan will also be hosting the
Rugby World Cup. No, I mean the economic revival, and the idea that, once
again, “Japan is back”.

During
the more than 20 years since Japan suffered a crash in stock and property
markets that was the biggest to be seen anywhere since 1929, there have been
many brief periods of optimism, many false dawns. Today’s dawn carries the name
of the prime minister who was elected last December in a landslide, Shinzo Abe
of the right-wing Liberal Democratic Party, and is known as “Abenomics”. But it
takes more than a slogan to reverse years of decline.

Foreign
visitors to Tokyo have often, during those two decades of stagnation, remarked
that Japan looks remarkably prosperous despite its troubles, full of impressive
new buildings and crowded shops. Yet Tokyo, and the view from luxury hotels and
taxis, offers a misleading impression.

The facts are
clear: during the 15 years from 1997-2012, Japan’s GDP per head of population
rose by just 8.1% in total, compared with rises of 15-25% in France, the US,
Germany and Britain (in that ascending order), a rise of 65% in neighbouring
South Korea, and a colossal rise of 266% in Japan’s historic rival, China. Only
one of the “G7” rich industrial nations performed worst than Japan on this
measure, and I am sorry to say that it was Italy (1.4% total growth in GDP per
head in 1997-2012).

If you go out of
Tokyo to Japan’s second city, Osaka, you can find real sights of poverty and
homelessness. Once famed for its equality, with 80% of Japanese telling opinion
polls they were “middle class”, Japan has now become much more unequal, with
poverty rising and nearly 40% of the labour force working on low-wage,
precarious short-term contracts. And like in Italy and Germany, Japan’s
demographic prospects are poor: its 120 million-strong population is ageing
fast, and on current trends is expected to shrink to something like 80-90
million by the end of the century.

So why the
optimism? The diagnosis offered by “Abenomics” has the merit of being simple,
and his political situation has the merit of being extremely strong, much
stronger than that of any Japanese prime minister for the past 30 years. So the
chance of him succeeding in implementing his plan is seen as being higher than
ever before during the country’s long stagnation.

To an Englishman,
it feels rather like the period for our own Margaret Thatcher, after she had
won the Falklands War to drive out the Argentine invaders in 1982 and then won
a huge majority in the 1983 general election. After three weak years, pledging
to end Britain’s long decline, she at last had a chance to really do something.

Mr Abe is rather
different from Mrs Thatcher. She, as a woman and in her philosophy, was an
outsider in her own party and to the British political establishment. Mr Abe is
the consummate Japanese political insider, grandson of the prime minister who
won the contest to host the 1964 Olympics, son of a foreign minister of the
1980s. And that is where the interesting questions about Abenomics and Japan’s
latest new dawn begin.

The diagnosis of
Abenomics is that Japan has suffered from falling prices, or deflation, ever
since the mid-1990s, which has depressed household consumption and caused
companies to hoard cash rather than spending it on new equipment or higher
wages. To cure this deflation, Doctor Abe prescribes a prolonged period of
money-printing by the Bank of Japan (what is these days known as “quantitative
easing”) and liberalising reforms to encourage companies to invest and expand.

For the
money-printing, he brought in a new governor for the central bank, and has
already seen a helpful by-product of the monetary expansion in the form of a 25%
devaluation of the Japanese currency, the yen. But what everyone is now waiting
for, and rushing to Tokyo to try to guage the prospects for, are the
liberalising reforms.

Japan’s
underlying economic problem is just like that of Italy. The country is full of
self-imposed obstacles to innovation, to new companies, to new employment, to
new investment of all kinds. Those obstacles have been imposed, or else reinforced, by the people and companies that benefited from
the old ways of doing things: from cartels, from regional electricity
monopolies, from strict regulations against new entrants, from labour laws that
made it almost impossible to dismiss an employee on a permanent contract and so
could only be circumvented by a precarious contract.

Turning
deflation into inflation, which is what Mr Abe and his new central bank
governor promise to do, will not remove those obstacles. In fact, if those
obstacles remain in place, and if new jobs and higher wages are not created,
inflation might make people poorer, not richer. It also could lead to a crisis
in Japan’s public finances, since its vast government debt makes even Italy’s
look reasonable, and it is vulnerable to rising interest rates. So the
liberalising reforms are the vital part of Abenomics.

The trouble is
that this is not truly a technical or simply economic matter. It is all about
politics. The problem of all these obstacles is a problem of how interest
groups become entrenched in our democracies, by becoming powerful lobbies, by
providing campaign finance, by providing votes. And the world champion at
exploiting that interest-group politics in the past was Mr Abe’s own Liberal
Democratic Party, which governed Japan for half a century.

Britain’s Mrs
Thatcher chose to confront interest groups, but they were chiefly outside her
own party: coal miners and other trade unions. Mr Abe has to confront them
chiefly inside his own party and its backers.  That confrontation will have to begin this autumn, for Mr
Abe’s political strength is currently at its peak, thanks to successful
elections, the Olympics victory, and six months of good economic data.

There is a case
for optimism. It is that just as it took the right-wing President Richard Nixon
to reverse US policy on Communist China in the 1970s, so perhaps only an
interest-group politician can confront interest-group politics. And the
Olympics could play a part, by providing a national goal, just seven years hence,
that could help force opponents to accept change and reform.

Yet the
resistance is strong and deep, just as it is in Italy. I have seen too many
false dawns, too many bold promises of reform that were unfulfilled, and so
despite being an admirer, even a lover, of Japan, I will wait to see the proof
that it is really happening. I do want to give Mr Abe a gold medal. But I will
wait till he wins the contest before putting the medal around his neck.