Commentary / Japan

New Cabinet's must-do economic policies

by Heizo Takenaka

The Sept. 4 reshuffle of Prime Minister Shinzo Abe’s Cabinet was the ninth since the current administration was launched in December 2012. What were the features of the reshuffle and what concrete policies will the new Cabinet be pursuing?

Before Abe’s current reign, the Liberal Democratic Party limited the tenure of its president to two consecutive three-year terms. Therefore, earlier long-running LDP administrations by Prime Minister Yasuhiro Nakasone and Junichiro Koizumi were wrapped up within six years. But a change to the rule in 2017 paved the way for an LDP president to serve up to three terms in a row. If Abe spends the full nine years in office, he will be the longest-serving prime minister in Japanese history.

Amid Abe’s dominant grip on power, there is speculation that he might serve a fourth term as LDP chief. However, people close to the prime minister seem to think that he will likely not seek to stay in office that long. If so, the latest reshuffle may turn out to be his last. Of course, the political situation could change and he might take charge of the administration even longer. But at least it should be kept in mind that Abe launched his new Cabinet knowing that it could be his final reshuffle.

That perspective leads us to two features of the new Cabinet lineup. The first is that he tapped many lawmakers close to him for ministerial positions, including Koichi Hagiuda as education minister, Yasutoshi Nishimura as economic revitalization minister and Katsuyuki Kawai as justice minister.

The second point of note is that he gave key ministerial and party posts to most of the powerful lawmakers, including those deemed as candidates to succeed him as prime minister. Hakubun Shimomura, a member of the LDP’s largest faction, led by Hiroyuki Hosoda, was appointed head of the LDP’s election strategy committee, while Toshimitsu Motegi and Katsunobu Kato, who belong to what was once the largest faction within the party, were given ministerial jobs. Taro Kono also remained in the Cabinet as defense minister. Abe retained Yoshihide Suga, the key veteran of his administration, as chief Cabinet secretary, while tapping Shinjiro Koizumi, the party’s rising star, as environment minister. By having these potential leaders compete with one another, Abe seems to hope the selection of his successor will move forward.

It appears that Abe carefully chose the lineup of his new Cabinet by taking various factors into account. The question is what agenda will the new Cabinet set and what economic policies it will pursue.

Generally speaking, when an administration is deemed to have entered its twilight phase, it is likely that the prime minister will not put a new challenge on its agenda but rather will tackle leftover issues — ones that were earlier discussed and partly addressed but without achieving much. This time, however, Abe has taken a different posture. He raised amending the Constitution and social security reforms — issues that require rather long-term efforts and could potentially divide public opinion — as the agenda of the new Cabinet. How strongly Abe’s new team will push for addressing these difficult matters needs to be closely monitored.

But an imminent challenge for the administration will be short-term economic policies. The liberal world order that has contributed to growth of the global economy, such as free trade, globalization and multilateralism, is being shaken at its core. The bitter confrontation between the United States and China and growing instability in the Middle East have put downward pressure on the world economy, raising concern over the risk of what might be called a geopolitical recession.

Indeed, growth in Germany, whose economy relies heavily on exports (47 percent of GDP), has dipped into the negative territory with minus 0.3 percent growth in the latest quarter. China’s economy has clearly slowed down — to 6.0 percent growth. Signs of a slowdown are also emerging in Japan. It is against this background that the consumption tax was raised to 10 percent on Tuesday.

A slowdown of Japan’s economy could again expand the demand-supply gap, which adds to the downward pressure on inflation, possibly putting a significant dent in the Abe administration’s consistent push since its launch to bust deflation.

Given the apparent limits to doing more on monetary policy, the only thinkable option would be to expand fiscal spending. However, raising the consumption tax on one hand and increasing fiscal spending on the other lacks policy consistency, and the government would be hard-pressed to explain it. What’s more, the government needs to explore what to spend on if it is going to increase fiscal expenditures.

Without doubt, the need for fiscal spending exists. An easy-to-understand example is investments in communications infrastructure related to the next-generation 5G high-speed networks that reflect technological innovation, and fiscal measures to assist them. Once the 5G networks are in place, they are expected to have the greatest effects in the field of remote medical services. However, Japan continues to impose heavy regulations on such services. The 5G infrastructure will be most effective if they’re deregulated. What’s crucial is to combine the fiscal spending and structural reforms such as deregulation.

The new Cabinet must pursue smart management of the economy that will achieve near-term stimulus and medium- to long-term growth in a consistent manner.

Heizo Takenaka, a professor emeritus at Keio University, served as the 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.

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