Abe hoopla aside, key economic challenges loom


Second In A Series

Stocks are up, the yen is easing and there is a new prime minister pledging to splash trillions of yen to breathe life into the country’s moribund economy: Last year ended on a high note for Japan Inc., and 2013 looks even more promising for some.

“This is an extremely strong Cabinet with a lot of depth,” Keidanren Chairman Hiromasa Yonekura commented after Prime Minister Shinzo Abe launched his administration Dec. 26.

Although the head of Japan’s most influential business lobby constantly criticized the previous government, headed by the Democratic Party of Japan, for failing to assert strong command, Yonekura welcomed Abe’s fiscal and economic policies and expressed optimism that they will spark growth.

In reality, however, 2013 will be another challenging year for the economy. Even before Abe’s Cabinet debuted, University of Tokyo professor Takatoshi Ito pointed out that the new administration under the Liberal Democratic Party must fend off numerous challenges if it aims to drag the nation out of the economic doldrums.

The LDP’s return to power in the Dec. 16 general election “does not provide a clear picture” as to how the economy will look in the new year, Ito told reporters at the Foreign Correspondents’ Club of Japan last month, pointing out that a series of events throughout the new year leaves much uncertain.

The first hurdle for Abe will be spurring domestic growth as early as possible, given that his government will decide whether the planned consumption tax hike in 2014 is feasible, based on available data and economic conditions in late 2013.

Legislation to increase the levy to 8 percent from 5 percent in 2014 and then to 10 percent the following year was passed by the DPJ administration of former Prime Minister Yoshihiko Noda, who staked his political career on the bill clearing the Diet. The LDP and partner New Komeito backed the bill.

While Noda ended up losing everything in exchange, stepping down as DPJ president after the party’s humiliating Lower House election defeat, raising the sales tax is viewed as a necessity. International Monetary Fund chief Christine Lagarde said in October that the tax hike bill represented “a very significant step toward (Japan’s) fiscal consolidation.”

“Abe will probably do whatever it takes to stimulate the economy in order to pave the way for a tax hike,” Toshihiro Nagahama, chief economist at Dai-ichi Life Research Institute, told The Japan Times. The LDP also needs quick results to woo voters in time for July’s Upper House election, he added.

But the tricky part will be stimulating the economy enough to end years of deflation without adding to the government’s already bloated debt.

Soon after being named finance minister, Taro Aso, Abe’s right-hand man, stated that the new government will not restrict itself to the ¥44 trillion cap placed on new bond issuance by the DPJ during its time in office.

In addition to seeking an ultraloose monetary policy, Abe’s economic agenda, dubbed “Abenomics” by economists and investors, includes forking out ¥200 trillion over the next 10 years on public works projects to improve disaster preparedness nationwide.

While promises of big spending have been one of the reasons for the spirited rally seen on the Tokyo Stock Exchange in the last few weeks, some analysts are already signaling caution.

“I hope the economic stimulus (under Abe’s government) will not ignore fiscal discipline,” departing Finance Minister Koriki Jojima said during a Dec. 18 news conference, referring to the country’s staggering ¥1 quadrillion worth of public debt.

Although Aso stated Dec. 27 that there is no chance of Japan turning into an economic basket case like Greece, having to crawl cap in hand to the IMF and the European Union for a bailout for its bankrupt economy, austerity-minded experts are nonetheless calling for restraint.

If fiscal prudence is neglected, “the public will be the ones who pay the price,” Jojima warned.

Meanwhile, passing a supplementary budget in the current fiscal year and drafting the fiscal 2013 budget in the early part of the year will be followed by another crucial event in April: the exit of Bank of Japan Gov. Masaaki Shirakawa, whose term will come to an end.

The central bank, which only months ago was highly critical of Abe’s suggestion that it adopt a more muscular, hands-on monetary policy, is expected to give in to pressure from his administration and double its inflation target for the consumer price index to 2 percent in January. But experts agree that still won’t be enough to stop Abe from appointing a new governor of the BOJ who will agree and acquiesce to his aggressive monetary easing.

On trade, Japan is expected to log the largest deficit in its history in calendar 2012, figures for which will be revealed later this month, though pundits believe rebuilding ties with China and South Korea frayed by territorial rows will be one major factor on the road to restoring a trade surplus.

Abe has softened his hawkish diplomacy somewhat, including his stance on the Japan-controlled but China-claimed Senkaku Islands, but the naming of ultraconservative lawmakers to his Cabinet, notably administrative reform minister Tomomi Inada and education minister Hakubun Shimomura, has already raised eyebrows in Beijing and Seoul.

Japan also faces a potential turning point this year on whether to take part in the Trans-Pacific Partnership free-trade talks, spearheaded by the United States. The LDP was lukewarm about joining the Pacific Rim trade framework during the election campaign, saying it would oppose joining the ongoing multilateral negotiations if “the premise that it will remove all customs tariffs without exception” proves accurate.

On the one hand, Keidanren’s Yonekura is pressuring Abe to quickly jump on the TPP bandwagon, since member countries are scheduled to finish hammering out all the details by the end of the year. But a sizeable part of the 294 LDP members who won a Lower House seat in December’s general election were strongly backed by farmers denouncing the trade pact.

Divergent opinions over participating in the TPP widened the existing chasm within the DPJ administration, and the LDP may find itself facing similar rifts.

“It will be difficult for the LDP to make a final decision on the TPP before the House of Councilors election in July. But it will be too late if it officially announces its stance after that point,” Nagahama of Dai-ichi Life said. “It will be important for Abe to make some sort of progress during his scheduled meeting in January with U.S. President Barack Obama.”

Nagahama went on to argue that all these domestic issues are just the tip of the iceberg in terms of the economic challenges Abe will face during his first year in office.

“We must not forget that the eurozone debt crisis remains the biggest threat. Even if Abe’s administration works hard on its fiscal and monetary policies, the domestic economy could be severely affected if anything more goes wrong in Europe,” he said.