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‘Abenomics’ stirring optimism in Southeast Asia

by Simon Tay

Special To The Japan Times

Japan has given a strong mandate to Prime Minister Shinzo Abe and the Liberal Democratic Party (LDP) coalition. By winning the Upper House elections, the Abe administration has majorities in both Houses to ease the passage of legislation. The premier can also plan on at least three years in office — lengthy tenure compared to recent predecessors.

The election consolidates power and paves the way for bold changes. Will “Abenomics” continue? What could a resurgent Japan mean for others in Asia?

Optimism is palpable. Since Abe came into office at the end of 2012, the economy has grown some 4.1 percent, and the stock market has hit peaks as much as 80 percent higher. These numbers have been driven by stimulus — with the Bank of Japan’s quantitative easing and increased government spending as the first and second “arrows” of Abenomics.

Now however comes the third and hardest part: structural reform and increasing productivity. Priorities outlined include bringing women into the workforce, educational reform, emphasizing innovation and cutting red tape. Financial consolidation and raising tax revenue is also critical, given the high level of public debt.

None of this is easy, and will be resisted by vested interests. That’s one reason past efforts stalled.

Some believe Abe will back away too. There is suspicion that his true ambitions are not economic reform but to raise Japan’s security capacity. Already the premier has mentioned revisiting the country’s pacifist postwar Constitution — a move controversial both at home and abroad. Already some in Beijing accuse Japan of building up naval and other defense forces to target China.

Pursuing security ambitions will dissipate Abenomics and should be resisted. With contention about the Senkaku Islands, the possibility of incidents and skirmishes at sea cannot be ruled out. Even short of that, Sino-Japanese turbulence can spill over and negatively impact Asian cooperation.

Much will depend on American policy. Shortly after the elections, Abe met U.S. Vice President Joe Biden while both were in Singapore. Abe then called for a summit with China without any preconditions.

It might be positive if Beijing agreed and talks could help ease Sino-Japanese tensions. But given Abe’s “no pre-conditions” approach, the Chinese leaders may prefer caution. Perhaps the present need instead is for dialogue on financial policies — both Asian giants are adjusting credit and other economic tools at the same time and the yen-yuan relationship could have outsized impacts on the region.

For others in Asia, they will do well to tell Tokyo clearly that tensions are not appreciated. Asians should also keep encouraging Abenomics. This can come through economic agreements — the U.S.-led Trans Pacific Partnership (TPP) and the Regional Comprehensive Economic Partnership (RCEP), which is centered on the Association of Southeast Asian Nations (ASEAN) and brings in all major Asian countries.

Tokyo is a key player, given that the U.S. is not in RCEP, and China stands presently outside the TPP. Concessions garnered in the agreements can help Abe push through the pain of structural changes, with the agreements serving as external anchors to domestic reform.

Reform and these economic agreements can fundamentally transform not just Japan’s domestic economy but also how it relates to the rest of Asia and especially ASEAN. Take investments.

Abenomics is triggering a resurgent interest in ASEAN. Early signs include Toyota’s $2.7 billion commitment at end 2012 to expand production facilities in Indonesia. Another and still ongoing Japanese multibillion dollar bid is by the Japanese financial group, MUFG, to buy Thailand’s Bank of Ayudha.

There is also potential for more two-way flow, for other Asians to invest in Japan. Deregulation and a single window of procedures will be needed. But if the yen is lower and stable, and the economy growing, Japan will have its attractions. Reform can also gradually open the society for more Asians with skills to work and study there, increasing people to people contact.

When he came into office, Abe made the point of visiting ASEAN countries first, as did other leading Cabinet members. A new Japanese-ASEAN partnership can be forged.

Yet even if Abenomics succeeds (and there remain doubts), there is no return to the days when Japanese invested in ASEAN for cheap land and labor, and dominated the region with little competition.

China and South Korea have emerged as major economic powers and many ASEAN countries and corporations have also made significant progress toward equality. A revitalized Japan will benefit the region, but its future relationship with a rising ASEAN must be more two-way and woven into the wider regional integration.

Simon Tay is chairman of the Singapore Institute of International Affairs and an associate professor at the National University of Singapore Faculty of Law.