Japanese Gamble 2014

28.01.14 Publication:

In democracies, when things are going badly citizens and commentators alike tend to call for “more leadership”. But then when they get leadership, they often feel rather uncomfortable and start to attack whoever is the leader. We always want to make sure that any nail that sticks up too high is hammered down. This is also a good description of how the world has viewed both Shinzo Abe and Japan over the past year.

For, during the past month or so, optimism and admiration have turned into worry and nervousness about Mr Abe and the sort of role Japan might play under his leadership during 2014. There have been many reasons for this change of heart, but the prime minister’s deliberately provocative visit to the Yasukuni Shrine on December 26th was the clincher.

This doesn’t mean that the world is going to turn actively hostile against Japan or Mr Abe personally. There is enough worry and nervousness about China, too, to make sure of that. Yet this action has helped turn what was already a doubting atmosphere into one of active suspicion about Mr Abe’s motives, his judgment and his likely priorities.

It has been a rapid change. For after years of lamenting Japanese economic and political weakness, calling for decisive action, especially after the tragedy of 3/11 and the Fukushima Dai-Ichi disaster, the birth of Abenomics transformed Japan’s image abroad. Suddenly, the country at last had a strong leader, with a big parliamentary majority, who seemed to be prepared to take extraordinary measures to wake the country out of its long economic sleep.

The fact that Mr Abe was also known to be a nationalist and a foreign-policy hawk did not disturb this positive view during the first half of 2013. In the face of Chinese assertiveness in the East China Sea, a stronger, more clear-thinking Japan was welcomed. It was welcomed especially by South-East Asian countries that also feel under pressure from China.

But in recent months, the doubts have grown. They centre on two fundamental questions: If Mr Abe cannot even have a summit with the president of Japan’s closest neighbor, South Korea, a democracy and a fellow ally of the USA, then where is his newly strong and decisive leadership heading?

And second, if Mr Abe cannot really begin his “third arrow” of real structural reforms, forcing special interest groups like farmers and doctors to accept fundamental reform and deregulation, in a year when he has combined electoral success with popular patriotic support, what hope is there for Abenomics to truly change Japan’s course?

The first of these questions is a particular worry in Washington. Pleasure at the resolution (for now) of the Okinawa base issue has been wiped out by horror at the deterioration of Japan’s relations with Korea and the feeling that Mr Abe’s visit to Yasukuni was a slap in the face to America even more than to China.

The worries are justified. For what both the Korean face-off and the Yasukuni visit suggest is continued Japanese weakness, not strength. Strong, confident leaders resolve issues, especially historical ones with intrinsically friendly countries such as Korea, rather than seeking to aggravate them for domestic political reasons. Sympathy with Japan over the Senkakus has been eroded, not boosted. China makes ritual protests, but secretly is delighted.

When Mr Abe entered office, many foreign governments and investors felt willing to accept a few nationalist gestures from him if those gestures would help build up support within the LDP for the liberalizing reforms that are needed to make Abenomics work. But that acceptance is not unlimited. As time has passed, it has become uncomfortably clear that Abenomics consists of monetary policy and little else. Everything else essentially represents the continuation of previous governments’ policies and promises. Only the monetary arrow is new.

This doesn’t guarantee failure: it is theoretically possible that corporate and household behavior really will be changed by the switch from deflation to inflation sufficiently in order to raise economic growth, and that productivity growth will follow, perhaps then making structural reforms more politically feasible. But it is a gamble, and one that symbolizes weakness not strength. And it is Japanese weakness that the world is going to worry about most in 2014.