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Abe set to overturn legacies of Koizumi and Nakasone

by Takamitsu Sawa

Up to the end of the 20th century, Japan had successfully reconstructed itself from the devastation of war, achieved rapid economic growth, overcame the shock from the 1970s oil crises and improved its international competitiveness in key industries such as electronics, automobiles and precision machinery — all under what might be called a democratic planned economy centered on the industrial policies crafted by the then Ministry of International Trade and Industry.

In 1993, the World Bank published a report titled “East Asian Miracle: Economic Growth and Public Policy,” touting as a “miracle” the economic growth achieved by East Asian countries, with Japan as the front-runner.

As the subtitle of the report indicates, World Bank economists were of the view that the East Asian nations could not have achieved the rapid growth without proper public (social) policies pursued by their respective governments, and thus highly evaluated the roles played by those governments. Indeed, not only in Japan but also in other East Asian countries, governments served the role of a control tower in their bid to catch up and excel advanced Western economies.

After Japan fell into recession in March 1991, the nation’s economic growth drastically decelerated. Even though the government may have successfully dealt with the nonperforming loan mess of the banking sector, it has not been able to pull the nation out of stagnant growth and deflation up to this day.

With his “No structural reforms, no growth” slogan, Prime Minister Junichiro Koizumi in the early 2000s pursued a policy of market-oriented economic reforms based on the belief that creation of free and competitive markets — or transforming the market economy to perfection — is the most appropriate, even if a roundabout, growth strategy for a democratic country.

Japan’s economic landscape radically changed under the Koizumi administration. But this change did not immediately help the Japanese economy regain its capability to grow. Of course, this in itself does not mean that the structural reforms initiated by Koizumi were a failure.

The current administration of Prime Minister Shinzo Abe, who returned to the government’s helm in December 2012 with a target of ending deflation, is in the process of formulating his new growth strategy. The biggest challenge Abe faces is identifying leading industrial sectors that can serve as the main pillars supporting the nation’s future growth.

True, the agriculture-forestry-fisheries sector and the medical industry are often mentioned as leading candidates. But both are weak sectors in Japan in terms of international competitiveness. It seems that the core of “Abenomics” is to turn weak industries in the Japanese economy into strong industries.

To promote the farm-forestry-fisheries sector, a proposal has been made to convert them into so-called hexagonal industries, which will involve not just production of primary products but also processing and sales of such products. Easing or eliminating regulations that hinder enlargement of productive operations in the sector has also been called for.

One strategy suggested for strengthening the medical industry is to create a Japanese version of the U.S. National Institutes of Health. Another calls for shortening the time required for a clinical trial of a newly developed drug prior to its approval.

Frankly speaking, though, I can hardly believe that measures to strengthen the agriculture-forestry-fishery and medical sectors could serve as a miracle growth strategy even though I recognize the need to strengthen these sectors.

Undoubtedly these two sectors are the top candidates to support a growth strategy for the next decade. But these two segments can hardly be expected to be capable of playing a leading role in pulling the Japanese economy out of deflation.

During a holiday-studded period from late April to early May 2013, Abe toured Russia and Middle East nations, accompanied by more than 100 business leaders. His unmatchable eagerness to attain economic growth by boosting exports is reflected in his initiative to become the nation’s “top salesman.”

While in Russia, he called the attention of President Vladimir Putin to Japan’s recycling technology and ability to supply heat and electricity in an efficient manner — both of which can contribute to improving urban environmental infrastructure — low-calorie Japanese cuisine and state-of-the-art medical technology and equipment.

In the United Arab Emirates and Turkey, Abe proposed concluding nuclear power agreements as an initial step toward exporting nuclear power reactors, saying that Japan intends to make reactors, each costing ¥400 billion to ¥500 billion, into the top item on its list of infrastructure exports.

As far as I know, no other Japanese prime minister has personally played the role of a top-level salesman. Probably there has not been any precedent of 100 business leaders accompanying a prime minister on a highest-level diplomatic mission.

A growth strategy based on infrastructure exports will have both an immediate effect and great sustainability, compared with other approaches. But if the prime minister is ready to serve as the top salesman, that is leaning too much toward state capitalism.

Moreover, as part of the second stage of his growth strategy, Abe is seeking to impose numerical obligations on businesses and universities in certain areas:

(1) Corporations will be required to increase their capital investments by 10 percent in the next two years to return to the level of ¥70 trillion recorded prior to the Lehman Brothers shock of 2008.

(2) Eight universities will be required to hire 1,500 foreign teachers as successors to some 1,000 teachers who will reach retirement age during the next several years.

It is clearly wrong for the government to impose such numerical obligations because decisions on capital investment and hiring of teachers are matters to be determined by corporations and universities.

Moreover, at his meeting Feb. 12 with top leaders of three major business organizations — Japan Business Federation (Keidanren), Japan Chamber of Commerce and Industry (Nissho), and Japan Association of Corporate Executives (Keizai Doyukai) — he called on companies with improved economic performance to consider raising wages.

He also said that while the Japanese economy has begun to show signs of recovery, the success of his administration’s economic policy will depends on whether hardworking people are rewarded with increased income, thus letting the economy fully break away from deflation.

Keidanren Chairman Hiromasa Yonekura responded by saying that improved business performance will be reflected in one-time allowances and bonuses, and that full-scale economic recovery will lead to higher wages and expanded employment opportunities. (As reported in the Feb. 13 morning edition of Nihon Keizai Shimbun.)

Certainly wages are to be determined in labor-management negotiations. I cannot help saying that it is grotesque that the prime minister has to ask business organizations to raise workers’ wages.

As has been seen, Abenomics is nothing more than an attempt to build a system of state capitalism. Perhaps there may be no other means to end deflation.

Taking the lead in this endeavor is the Ministry of Economy, Trade and Industry with major roles played by the Ministry of Agriculture, Forestry and Fisheries; the Ministry of Health, Labor and Welfare; the Ministry of Land, Infrastructure, Transport and Tourism; and the Ministry of Education, Culture, Sports, Science and Technology.

Past policies based on state capitalism were instrumental in achieving postwar reconstruction and high economic growth and in overcoming the oil crises and the financial crisis triggered by the bursting of economic bubbles.

Abe has completely overturned the moves by former Prime Ministers Yasuhiro Nakasone and Koizumi toward small government, in which economic results were to be left to the workings of free, competitive markets.

He thus overturned Nakasone and Koizumi’s attempt to turn the Liberal Democratic Party into a conservative party modeled on the Conservative Party of Britain and the Republican Party of the United States.

In other words, it’s as if Abe has resurrected the old LDP as well as an administration controlled by bureaucrats, both of which Koizumi set out to destroy.

Takamitsu Sawa is president of Shiga University.

  • chrisvsch

    Looking from afar Japan’s business culture appears in the main to be very rigid. It is therefore not wholly inappropriate for PM Abe to set goals a la France’s ‘dirigiste’ policy to give some impetus to his reforms. Goal setting when done in consultation with corporate leaders is not tantamount to state capitalism especially if there is sufficient flexibility in how the goals are to be attained.

  • Dipak Bose

    Abe is doing just fine. Koujumi has nearly destroyed the economy by his wrong policy of privatization.
    It is good that Abe is going way from Koujumi’s policy