Donald Trump has already made Japan’s reflation efforts great again.
One day after his stunning U.S. election upset, rising Treasury bond yields drove the yen to its lowest levels since July — great news for a government panicking over currency strength. Whether the yen’s about-face lasts is anyone’s guess. But there is one potential lasting effect from Trump seizing the Oval Office: pumping new urgency into Tokyo’s structural reform efforts.
Arguably no developed-world leader is more panicked by the about-face in Washington than Prime Minister Shinzo Abe. He spent the last 1,416 days cozying up to U.S. President Barack Obama. So keen was Abe to be the White House’s go-to guy in Asia that he joined Obama’s Trans-Pacific Partnership, risking the ire of powerful vested interests like agriculture. Now, Abe fears Trump’s undo-all-things-Obama platform will include U.S.-Japan relations. So, he’s making a beeline for New York to meet Obama’s successor, where they’ll chat on Nov. 17.
Abe, no doubt, will come away knowing Japan must prove itself in Trump’s America. Based on Trump’s rhetoric, the businessman-turned-politician is ambivalent about a friendship that’s everything to Abe’s Liberal Democratic Party. Trump often conflates Japan’s idiosyncrasies with China’s threats to U.S. workers, greatly alarming the Tokyo establishment. He also suggests Japan should pay the U.S. to stay under its security umbrella.
What’s Abe to do? Make Abenomics a reality. Nothing impresses Trump more than success. And nothing would catch a Trump administration’s attention faster than a boom that makes its goal of “doubling” U.S. growth easier. The faster Abe’s Japan becomes a solution to the world’s slow-growth problems, rather than a cause of weak pricing power, the faster it’ll be an asset in Trump’s world view — with all the relevance and leverage that status affords.
The TPP is sure to be one of Abe’s talking points in New York next week. He should forget a trade pact that’s more about corporate giveaways than job creation. Instead, he should take Abenomics off the drawing board and shake up the Tokyo establishment. A bit of a reach, admittedly, since Abe’s party is the establishment, ruling Japan for all but a few years since 1955. But Abe has what past reforms didn’t: high approval ratings, majorities in both houses of the Diet and broadly accepted blueprint for a more vibrant and innovative Japan.
What Abe will soon lack is equally important: an enabler in the White House. In his zeal to contain China, Obama looked the other way as the Bank of Japan devalued the yen. Funny how talk of currency “manipulation” was directed at Beijing, when Tokyo’s policies made hypocrites out of Treasury Department officials.
Trouble is, Abenomics never really got out of monetary-policy mode. Abe largely shelved the fiscal pump-priming part of the plan. When it came to the most important phase — deregulation — he went for low-hanging fruit: modest corporate-governance tweaks, support for women that’s more rhetorical than substantive and joining a trade pact that’s more a geostrategic statement than job creator.
With TPP in the morgue and Trump agnostic about Japan’s role in his orbit, Abe should redouble his reform efforts. To get Abenomics out of first gear, Tokyo must devise a specific timeline for supply-side changes. This month, Abe’s team should say, we’re working to lower trade barriers ahead of any Trump signals on trade. Next month, we’re taking on labor reforms to make the economy more flexible and less vulnerable to productivity-killing seniority-based promotion norms. The month after that, we’ll tackle a tax regime that favors giant exporters over startups to increase job creation.
After that, we’ll ensure women have more upward mobility in the private and public sectors; prod conglomerates sitting on trillions of dollars of cash to fatten paychecks; make change-averse bureaucrats more accountable; and write an energy policy that puts renewables innovation above nuclear reactors.
Other changes Abe’s team should telegraph include creating a giant government-funded venture capital scheme to encourage entrepreneurship; remove corporate takeover defenses; discourage cross-shareholding arrangements; import more foreign talent; punish scandal-plagued executives at places like Takata and Toshiba; end the practice of bureaucrats getting cushy private sector jobs after retirement; encourage greater risk taking among millennials; and urge youngsters to study and work abroad to diversify the idea mix.
Part of Abe’s pitch is educational. He’s keen to remind Trump Japan is no longer stealing U.S. jobs or gorging on its real estate a la 1986. He’ll detail how Japan already pays billions of dollars per year for America’s protection — and sell Trump on supporting Japan’s own weapons export industry. But by convincing Trump that Japan is more turnaround story than cautionary tale — a valued business partner creating investment opportunities — Abe can avoid the new administration’s wrath and revive growth once and for all.
Based in Tokyo, William Pesek is executive editor of Barron’s Asia and writes on Asian economics, markets and politics. www.barronsasia.com
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