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Stop blaming China for the Nikkei’s gloom

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Barron's Asia

The Nikkei’s sudden brush with doom and gloom is all China’s fault. If only those hacks in Beijing knew how to run an economy, Japanese stocks would be booming, deflation a distant memory and Abenomics 101 the newest class at Harvard Business School this semester.

Back on planet Earth, the Tokyo conventional wisdom is coming in for a brutal reality check. The Nikkei has officially entered a bear market, with shares down 21 percent on Wednesday from a recent peak in June. The blame doesn’t belong to China, but to Prime Minister Shinzo Abe squandering three-plus years of the most enviable reform environment Japan has seen in decades. If Abe had delivered on even 10 percent of the restructuring he promised, investors wouldn’t be fleeing, regardless of China’s growth rate.

Abe’s done even less than that. Never mind asking where the 1,121 days of his premiership went. Let’s explore the last 403. In December 2014, Abe held a snap election the Japanese didn’t want. The ostensible reason: to win a fresh mandate to implement his “three arrows” of economic revival.

While the first (monetary easing) had already been deployed, the second (fiscal spending) was in the quiver, while the third and most important (deregulation) hadn’t left the arrow bag. The new mandate, Abe said, would give him room to fire away at growth impediments from rigid labor markets to high trade barriers to stifling red tape to a tax code and an education system inhibiting innovation.

Yet 57 weeks and 4 days on, Abe has made almost zero progress taking the weights off Japan’s ankles. And now, his eyes are on another electoral prize: Upper House elections in July. Abe will squander the next 165 days or so campaigning for a new, new mandate. That’s 6 months added to the 37 Abe already blew on pet projects outside his original mandate (the economy) like reinterpreting the war-renouncing constitution and passing a draconian secrets bill.

Sure, Abe has thrown international investors a bone or two. He’s taken steps, albeit tentatively, to improve corporate governance and urge companies to better utilize the female workforce. And, Abe’s chosen Bank of Japan chief, Haruhiko Kuroda, flooded the world with yen, inflating corporate profits and the Nikkei.

The BOJ’s trillions aren’t what they used to be, though, and investors are fleeing. True, the slowest Chinese growth in 25 years comes at an inconvenient moment for Abenomics. But as this column has pointed out before, most Japanese exports to China go into goods destined for the U.S. and Europe. Weak Chinese demand isn’t the imminent threat Abe wants the world to think. Truth is, Japan would be taking China in its stride if Abe had done what voters thought he would.

The tragedy is that Abe had it all: majorities in both houses of the Diet, a population hankering for change as China eclipses Japan, high approval ratings and an ambitious plan that cheered investors. If even a Japanese leader with all the ingredients for success punts on reform, what hope does the next have? History will remember Abe not for what he did with the economy, but what he didn’t.

Things may get worse with Abe’s economy minister embroiled in a graft controversy. It’d be more comforting if Akira Amari categorically denied a magazine report alleging that he and his secretary took money from a Chiba-based construction company. But Amari’s claim that his memory of the scheme is “fuzzy” doesn’t sound promising as these things go. Abe may now be even more distracted spinning the scandal.

Where to now? To win back the momentum, and reassure investors, Abe must start speaking in specifics and present a schedule for implementation. This week, he should declare, my government will put forth a detailed plan to lower tariffs to open our markets whether or not the U.S.-led Trans-Pacific Partnership materializes. Next month, we’ll ask parliament to change tax incentives for startup companies and new policies to support and encourage young innovators.

Come March, Abe should continue, I’ll ask lawmakers to approve quotas for female politicians and corporate executives. April will bring plans to balance the world’s largest debt with a rapidly declining population. After that, we’ll offer new ideas on reining in public debt without hiking sales taxes next year. We’ll also brainstorm on a new energy policy, immigration and improving English proficiency to attract the foreign talent Japan lacks. And so on.

In September 2013, Abe visited the New York Stock Exchange and told traders that “Japan is back” and open to foreign capital. Abe has a chance to prove it amid reports Taiwan’s Foxconn wants to buy Sharp. Abe’s Liberal Democratic Party can do the expected and quash a deal or surprise the world and allow foreigners to acquire the Japan Inc. icon.

Yes, change takes time in Japan. The Tokyo bureaucracy, it’s often said, runs the nation — not the prime minister. Well, let’s take on the nameless, faceless government apparatchiks stymying change. Thing is, time wasn’t on Japan’s side in December 2012, when Abe swept to power — not with an ascendant China spreading its wings. With his parliamentary clout, opposition parties in disarray and domestic crises mounting, Abe is just the leader to demand greater urgency and bigger thinking. But make no mistake — saving the Nikkei is on Abe, not Beijing.

William Pesek, executive editor of Barron’s Asia, is based in Tokyo and writes on Asian economics, markets and politics. www.barronsasia.com