Commentary / Japan | C Commentary

Managing the economy in a slowdown

by Heizo Takenaka

The ruling coalition of the Liberal Democratic Party and Komeito emerged victorious in the Upper House election last week, as widely anticipated in media polls. Many people expect that stability in government administration will continue in Japan, even as the rise of far-right or far-left forces have destabilized politics in many other countries. Still, Japan’s economy is forecast to slow down going forward, and the government will be confronted with greater difficulties in managing the economy. The Abe administration’s economic policy management is indeed at a critical juncture.

The election appeared to have been held without any clear campaign issues. One reason is that the government and the ruling alliance, concerned with potential impact on the Upper House race, kept to cautious and conservative policy management. Prime Minister Shinzo Abe attempted to put constitutional revision on the campaign agenda, but that did not really stir up voters’ interest. In addition, the opposition camp was unable to present any effective counterproposal to the government’s policies and mostly focused on attacking petty scandals involving the administration.

As a consequence, the key point of contention between the ruling bloc and the opposition camp was on whether the current administration’s Abenomics economic policy package has been successful. Of course, the ruling coalition emphasized the positive impact of the policies, and the opposition parties tried to deny their benefits.

As far as macroeconomic indicators are concerned, the ruling bloc’s argument was fairly persuasive. In the five years from 2012 — when Abe returned to power — to 2017, Japan’s nominal GDP grew 10.9 percent and an additional 2.51 million people found jobs. Since 2015 onward, the number of people on regular full-time employment rose by 1.35 million. Corporate profits expanded 1.7 times over the five-year period, while the number of bankruptcies fell by 28 percent. The unemployment rate hovers around 2.5 percent — the lowest level among major industrialized economies. The inflation rate has reached around 1 percent, making it certain that Japan is no longer in a state of deflation.

On the other hand, the opposition parties, while acknowledging the growth of the economy, charged that the benefits of Abenomics have been monopolized by some big companies and the wealthy population. They also lashed out against the administration for inconsistencies in official statistics on real wages. Their argument largely followed the pattern of similar opposition criticism against the government in the past — and was commonly observed among opposition parties in many other countries.

In fact, the Gini coefficient, an indicator of an income gap between the rich and the poor, is on an upward trend worldwide and Japan is no exception. Surely, there is room for improvement in income redistribution in Japan. But as far as macroeconomic indictors show, the overall performance of the economy has no doubt turned significantly for the better since the current Abe administration was launched in the change of government in 2012. And that was reflected in the outcome of the Upper House race.

But with the election now behind us, the government faces a host of new problems in managing the economy. Clearly, warning signals are flashing over the economy following an extended boom cycle. One factor is that the boom cycle has already lasted over a fairly long period. What’s more, there are growing fears over the course of the world economy due to the trade conflict between the United States and China.

When Chinese Premier Li Keqiang made a keynote speech at the Summer Davos conference of the World Economic Forum in Dalian last month, he gave a highly optimistic view, stressing that the Chinese economy is robust enough and will not buckle under pressure from the U.S. But at the same time, he made it clear that China will fully mobilize fiscal and monetary policies — a clear indication that China is indeed worried about a downturn of its economy. China’s GDP growth came down to 6.2 percent in the April-June period, the slowest in 27 years. Repercussions of the slowdown in Chinese growth are already felt in its Asian neighbors that rely heavily on foreign trade. The economies of Hong Kong and Singapore have reportedly suffered the lowest growth in 10 years.

The government estimated that Japan’s economy would grow 1.8 percent in fiscal 2018. As it turned out, growth for the fiscal year came to only 0.7 percent. The government initially forecast a 1.3 percent growth for fiscal 2019, but that target was deemed extremely difficult to achieve in view of the slowdown in China and its Asian neighbors as well as the consumption tax hike planned in October. On Monday, the target was revised downward to 0.9 percent.

Under these circumstances, a grave problem may arise. The demand-supply gap can begin to expand again, adding deflationary pressure on the economy. A key agenda of Abenomics has been to overcome deflation, and inflation has somehow been pushed up to the positive territory. However, the current conditions threaten to cancel that achievement. To prevent that from happening, the administration needs to exert political leadership to carry out larger-scale policies than have been implemented to push forward structural reforms such as deregulation — where Abenomics has so far been lagging — and aggressive fiscal measures.

The Abe administration has secured a stable political footing, but is now confronted with major challenges in its economic policies. The last time it faced the big economic challenges was when the administration was launched in 2012. To rebuild the economy that suffered a lot under the previous government, Abe gave the Bank of Japan an inflation target and appointed a new BOJ governor who could carry it out, and managed to realize significant increases in share prices. The question is whether the administration can launch a new policy initiative that would equal that in scale — to change the economy’s landscape. That is indeed what’s required of the administration of Abe, now in his third three-year term as LDP president, to avoid becoming a lame duck.

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.