Japan is about to get a new government and it’s just like old times. Liberal Democratic Party leader Shinzo Abe, who is set to become prime minister, again sounds as if he has been spending his time out of office back in the 1960s.
Growth is everything and growth shall be achieved through big spending programs by the government. A cheap yen is essential for export-led Japan and shall be realized through big monetary expansion by the central bank. People should look after themselves and should not expect to be coddled by the state. Rip van Winkle walks among us once more.
Yet he is a Winkle with a difference. Abe 2.0 sounds a great deal more unilateralist and pugnacious than the last version. He has always been active in the realm of foreign policy, of course. But this time round, his aggressiveness seems to have seeped into his economic management.
For Abe would have it that the Bank of Japan serve at his beck and call to pump money into the economy as he dictates. He has made public his desire to change the BOJ law to make the central bank less independent and much more accountable to himself and the government. Indeed, this was one of his original campaign pledges during the general election.
In the middle of the campaign, he was forced to tone himself down a bit as his own colleagues began getting cold feet upon experiencing his gung-ho aggression. But now that he has two-thirds of the Lower House seats under his belt, Abe clearly sees no need to mask his ambitions.
It is as sad as it is worrying that Abe and company have learned so little during their time in opposition. They were given three years in which to get themselves acquainted with reality without having to constantly and immediately come up with policy answers. In that respect, being thrust into the political wilderness surely had its advantages. Advantages that Abe & Co. clearly have chosen to ignore. It seems they went into hibernation for the duration, rather than doing their homework and going out to see what was happening in the field or to ponder Japan’s role in the greater scheme of things.
Of specific concern is Abe’s stated determination to bring down the yen’s exchange rate against the dollar. The pain endured by companies under a rising yen is well understood. Yet there are limits to what policy can do to reverse what makes perfect sense in economic terms.
The tug of war between irresistible force and immovable object is a common one. Abe is evidently set on becoming the irresistible force that stems the yen’s rise. He may succeed for the time being, but over the longer term an appreciating yen is an immovable object that reflects Japan’s position as the largest creditor nation and the corresponding position of the United States as the largest indebted one.
It is folly to go at such an object even if you have enough credentials to consider yourself an irresistible force. Yet even the largest creditor nation in the world does not have the resources to lay claim to that title.
Given the circumstances, all that a cheaper yen policy will amount to is the declaration of a currency war against the United States, which in turn is keen to follow a cheaper dollar policy in aid of its exporters.
Surely, Abe would not want to be known as the comeback kid who waged currency warfare against Japan’s closest ally.
Noriko Hama is an economist and professor at Doshisha University Graduate School of Business.
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