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A midterm review of Abenomics

by Heizo Takenaka

Prime Minister Shinzo Abe is no doubt poised to lead a long-running administration. Since his current government was launched in December 2012, Abe has led his ruling coalition to big wins in two Lower House elections and two Upper House elections. Today, his Cabinet enjoys sufficiently strong popular approval ratings of around 50 percent.

If he is re-elected to a third term as president of the Liberal Democratic Party next year, he can stay in office through summer 2021, thus remaining at the government’s helm for nine years. In that sense, the Abe administration, now in power for nearly five years, is roughly at its halfway point.

Here I would like to make a midterm review of the Abe administration’s economic policies.

Much improvement, but …

In November 2012, when it was deemed almost certain that Abe would take power, the Nikkei 225 average on the Tokyo Stock Exchange stood at around the mid-8,000 point. Today, the key market gauge is in the 22,000 range. In the labor market, the ratio of job offers to job seekers has risen from 0.9 to 1.55. The unemployment rate has fallen from over 4 percent to 2.8 percent. Clearly, the economy has improved significantly. Among other signs of this reinvigoration, the number of inbound tourists shot up from around 8 million in 2012 to 24 million last year, thanks to deregulation of visa requirements and the benefits of the weaker yen. The number is estimated to keep rising to 28 million this year.

On the other hand, a number of serious challenges remain. Efforts for fiscal consolidation and revitalization of regional economies remain slow, while the expanding income disparity between the rich and poor has been left unaddressed.

But what’s more crucial is that despite the sharp improvement of the economy, Japan’s position in the world has deteriorated even further. Japan is rated at a sluggish 26th in the World Bank’s competitiveness ranking of countries this year.

What’s also alarming is that the international rankings of Japanese universities — which need to play a key role as the nation tries to cope with the Fourth Industrial Revolution — keep going down. The University of Tokyo, which used to be rated among the world’s top 20 institutions, is now ranked 46th.

The bottom line is that while Abenomics has substantially lifted up the economy, it has yet to sufficiently cope with the rapid changes taking place in the rest of the world.

Three features

Behind these developments, we can highlight several characteristics of policy formulation in the Abe administration.

The first is that his Cabinet relies heavily on the prime minister himself and Chief Cabinet Secretary Yoshihide Suga. Whereas policy initiatives that grabbed the attention of the prime minister and the chief Cabinet secretary are implemented quickly in a top-down decision, economic reforms discussed in such forums as the Council on Economic and Fiscal Policy and the regulatory reform conference make slow progress.

Typical examples are the delays in fiscal rehabilitation efforts and social security reforms. What this also means is that Cabinet members other than the prime minister and the chief Cabinet secretary are not assuming a sufficient number of roles.

The second feature is that the current administration depends thoroughly on the Ministry of Economy, Trade and Industry, while to varying degrees the Finance Ministry had exerted major influence over past administrations. Key positions in Abe’s Cabinet such as secretaries and assistants to the prime minister are occupied by current and former METI officials. As a result, the administration tends to be quick in beefing up policies on issues in each industrial sector but is slow to address macroeconomic policies and major systematic reforms.

Third, the Abe administration faces a tough challenge of steering economic reforms as it fights against a hostile segment of the media. In Europe and the United States, the rise of populism caused by social divides has led to political confusion. It is believed that Japan also has a disgruntled segment of society that is expanding amid the wave of globalization and technological innovation. Some members of the mass media have launched a biased assault on the government with opinions and viewpoints that cater to people’s dissatisfactions.

When the Abe administration authorizing a new veterinary medicine department at a university for the first time in 52 years, many media outlets did not evaluate the deregulation measure fairly and instead criticized the fact that the university’s operator happened to be a friend of the prime minister.

What’s troubling in a democracy is that public opinion tends to be heavily influenced by such reporting. In fact, the Abe Cabinet’s approval ratings nose-dived in the summer — albeit temporarily — due chiefly to the furor over the new veterinary medicine department.

Owing to the biased media coverage, the Abe administration’s posture toward reform has suffered a setback. One example is the slower pace at which regulatory reforms have proceeded by taking advantage of the system of national strategic special districts. Politics in Japan may seem much more stable than in many Western countries, but it is still influenced by the phenomenon of social divide.

What will the legacy be?

Abenomics has no doubt significantly improved the economy. Now that Abe’s grip on power looks increasingly likely to be extended, the next question is what should be the legacy of his administration. Given that his ruling coalition and its allies have secured a two-thirds majority in both chambers of the Diet, there’s a good chance that he will embark on amending the Constitution, which, if realized, would certainly be a legacy of his administration.

At the same time, however, what the markets expect of his administration is a legacy in terms of economic policy. There are numerous policies that can be potential legacies of this administration, including a fundamental overhaul of the social security system to thwart the social divide, the major reform of the My Number individual identification system as the key infrastructure in the Fourth Industrial Revolution and beefing up the concession scheme to meet new infrastructure demand.

Abenomics has achieved much in terms of policies that make the current economy better. Having given its policies a midterm review, I would expect the administration to embark on an even bolder set of economic reforms for future generations.

Heizo Takenaka, a professor emeritus of Keio University, served as economic and fiscal policy minister in the Cabinet of Prime Minister Junichiro Koizumi from 2001 to 2005. He is a member of the government’s Industrial Competitiveness Council.