Commentary / Japan

Abe's lesson in stability and pragmatism

by Jesper Koll

Prime Minister Shinzo Abe’s Japan is a forward-looking, pragmatic bastion of stability in an increasingly uncertain world. His Cabinet reshuffle this week cements further the unique position Japanese politics and policy-making occupies relative to most other democratically elected governments.

Abe is in complete control of his destiny, picking and choosing competent and loyal elected lawmakers to further advance his national agenda. Right from the start in December 2012, the goal of Team Abe has been single-minded, echoing the rallying cry that inspired the leaders of the Meiji Restoration: “Fukoku Kyohei” (Strong Country, Strong Army).

Don’t get me wrong — this is not about re-armament like it was during the 19th century Meiji Era. I draw attention to the Fukoku Kyohei rallying cry to stress that Abe’s team is perfectly focused and capable of using political capital for both a strong economy and constitutional reform. In fact, without the first, the second may never happen.

Abe’s leadership team has always remained relentless in pursuing strategies that aim to restore Japan’s place in the world as a respected, admired and worthy top-tier nation; and they know that, first and foremost, a strong, growing and competitive economy is the most necessary condition to achieve that goal. The second condition is a stronger, smarter and more independent sense of national self-determination and pride among Japanese people. This is where Team Abe is convinced constitutional reform is necessary as a powerful symbol and catalyst for greater national unity and understanding of what Japan is and wants to be.

The Abe-Aso-Kuroda master class in policy pragmatism continues.

First, for economic policy management the “Abe-Aso-Kuroda” central axis got re-enforced. Nowhere else in the world of global policymaking can you find such a consistently well-coordinated and decisive axis of power between the prime minister, the fiscal authority (Finance Minister Taro Aso) and the central bank (Bank of Japan Gov. Haruhiko Kuroda). Abe-Aso-Kuroda will continue their master class in policy coordination.

Where the United States and Europe are wasting time debating terminology and procedure, Japan is way ahead in actually implementing “fiscal dominance” and Modern Monetary Theory. The Abe-Aso-Kuroda axis simply gets on with it, because they have something that both Europe and America appear to have lost — political and policy consensus.

If at all, Europe and America, at least to this observer, recall the fumbling and growing desperation Japan went through during the long period of political instability before Abe arrived. To turn Modern Monetary Theory into practice, you actually need functioning and decisive fiscal coordination and plans that go beyond the expediencies of annual budget cycles or election cycle pork-barreling. No fiscal policy vision, no fiscal dominance. Make no mistake: Abe-Aso-Kuroda do know what they want to spend on.

Watch for an added fiscal spending boost if or when global or local economic momentum loses steam; and yes, the BOJ will finance the added borrowing requirement if excess savings fail to absorb it.

What about “structural reform”?

Here the Cabinet reshuffle opens the door for new ideas and initiatives. Both the minister of economy, trade and industry and the economic revitalization minister have been replaced with U.S.-educated, highly competent young leaders. It is right to expect a pickup in the structural reform policy proposal metabolism, with a particular focus on boosting entrepreneurship, speeding up industrial reorganization (i.e., M&A, MBO and spin-out rules), regional revitalization and special economic zones, etc.

Importantly, the new METI chief, Isshu Sugawara, served as deputy finance minister before, which could lead to closer linkage between tax incentives and industrial reorganization. The new economic revitalization minister is Yasutoshi Nishimura, a former METI bureaucrat who is well-known in Silicon Valley and Israeli startup and venture capital circles. All said, what Abe-Aso-Kuroda bring for stability, Sugawara and Nishimura will do for innovation and creative structural change.

Yes, constitutional reform is on the agenda.

Led by the prime minister, Team Abe is now readying to take concrete steps toward constitutional revision. Specifically, one of Abe’s closest allies and trusted friend, Hiroshige Seko, has accepted a repositioning away from the Cabinet (he was METI chief) to become secretary-general of the LDP’s Upper House caucus.

This is not a demotion but the strongest signal that Abe’s team is gearing up for the complex parliamentary procedures necessary to initiate constitutional reform (they need a two-thirds supermajority in both the lower and upper chambers of the Diet; after that the amendment has to be approved with a simple majority in a national referendum). With an outstanding track record as a creative and loyal fighter and mobilizer, Seko is now Abe’s chief whip charged with getting the Upper House politicians in line for the constitutional vote.

Here, the sense of urgency is growing. Although the third term of Abe’s LDP presidency ends in September 2021, and most people suggest a constitutional amendment would probably take at least eight to 15 months to wind its way through the Diet, my suspicion is that Abe and his team are going to attempt a more fast-track push over the next six to 12 months.

The temptation of riding the likely popular tailwinds from next year’s Tokyo Olympics is real; as is the Machiavellian calculation of doing this before the next U.S. presidential election. However, while timing remains anyone’s guess, the dead-set focus on seeking to maintain a strong “economic feel-good factor” is a certainty. Team Abe must have as perfect a track record on economic management as possible to have a shot at persuading voters to support a constitutional amendment.

Getting ready for the post-Abe era?

It is still much too early to begin serious debate about a post-Abe Japan. His grip on power is simply too strong and his political will to create a historic legacy that goes beyond anything we have seen in postwar Japan is simply too overwhelming. Challengers are explicitly warned to stay out of the way.

Yes, young and popular Shinjiro Koizumi is now in the Cabinet, as environment minister. Personally I hope he’ll turn this historically dull post into something relevant and inspiring. A new Japan green deal may boost his popularity further; and if Koizumi can build a consensus together with the deeply entrenched industrial interests (energy policy, plastics policy, etc.), he will deserve to be taken as a serious contender.

Ditto for Katsunobu Kato, who now serves as health, labor and welfare minister, and is charged with creating entitlement reform. If Kato can reign in Japan’s runaway costs for social security and health care without incurring a voter backlash, he surely deserves to become the top leader. It will be interesting to watch the developments, but, as I said, for now the focus must stay on the prime minister and his relentless drive to build his legacy as the leader who truly restores Japan to top-tier nation status.

All said, Japanese politics in general, policymaking in particular, is set to stay a “bastion of stability.” Team Abe is in power, is not afraid to use power, and, most importantly, has an agenda that is pro-growth and pro-business. Sooner or later, this should force a breakout from the current “value trap” Japanese financial markets have fallen into since last year.

Based in Tokyo, Jesper Koll is WisdomTree’s head of Japan. Researching and investing in Japan since 1986, he is consistently ranked as a top Japan strategist/economist. He publishes blogs at www.wisdomtree.com/blog .

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