Canada: Japan’s Immediate And Longer Term Outlook

The start of 2014 provides a good point for looking ahead at the immediate and longer-term challenges facing Japan under the government of Shinzo Abe.

Looking back, 2013 has been a good year for Japan, for the Japanese and for Prime Minister Abe, who came to power only a year ago.  If things go well, historians may one day classify 2013 as the beginning of a "New Japan", the year when the country bid farewell to two decades of economic stagnation, re-kindled a new sense of confidence among its citizens for the future, and ushered in a return to a strong economic presence internationally for Japan.

Whether historians look as positively on Japan's more assertive security profile in Asia may be more problematic, although on this matter the rise of Chinese and its own assertiveness give Japan little choice but to be confident its safety is assured.  It is the nationalist tone of Japan's public positioning under Abe's leadership that raises the biggest questions.

Meanwhile politically, Abe goes into 2014 very much in control of both his party and the Japanese Diet following his strong Upper House victory in 2013.  There is no effective opposition in either his party or in the Diet, something new in recent Japanese politics and worrying to some Japanese, as Abe further strengthens central control over the administration. In December, he pushed through legislation creating a National Security Council and tougher secrecy rules to protect government information.

The Economic Turnaround and Reform Efforts Should Continue in 2014

There is no doubt that Abe is on the right track with his "Abenomics" agenda, led off in 2013 by its first two "arrows" — a major fiscal stimulus and the radical measures of the Bank of Japan to end 15 years of deflation. However, the government faces a continuing challenge in juggling the complex economic forces in play and sustaining the early successes.

For example, in April 2014, the government will — as it must — begin to tackle its major structural debt (now nearing 250% of GDP) by raising the consumption tax from 5% to 8%, with a further 2% to be added later.  To counter the negative impact this tax increase will have on still-fragile growth, the government is pressing big businesses to grant their employees the first significant annual wage increase in many years when they sit down with unions this spring for the annual wage negotiations. The government is confident business will agree. It is also standing by with another stimulus package.

Despite the challenges, most observers believe the government can manage the complexities.

They are less sure about the Prime Minister's ability to deliver on his "third" arrow — implementing the transformative structural reforms critical to a long-term recovery in Japan's economic fortune.  A list of such reforms was announced in general terms in mid 2013, but little progress has been made so far.

The most visible element to-date has been Japan's entry into the Trans-Pacific Partnership trade negotiations, and the launch of several bilateral trade talks led by those with the EU and including Canada.  Eventual agreements could force industrial, regulatory and other changes within Japan, leading to a more open and efficient economy, starting with the agricultural sector.

The Abe government has thrown all its trade negotiating resources at the TPP negotiations, at the cost of those with the EU and Canada.  The TPP talks are now expected to come to a conclusion in the first quarter of 2014, following the delay created at the last round in Singapore in December primarily as a result of big gaps between the U.S. and Japan on agriculture and other issues.  There is some concern Japan may be digging in once again on agriculture reform — not a good sign.

Underlying Factors Should Help Longer Term Reform

Among longer-term reforms, the government has talked about a greater role for women in the work force as essential to deal with a declining and aging population and increasing shortages of labour. Japanese business particularly is still overwhelmingly a male preserve. While the government has announced measures to attract foreigners into executive positions in business and intends to open its universities to foreign professors, it has yet not shown any great readiness to widen the legal admission of foreign workers, especially in certain sectors such as health care where shortages are already evident and growing.

As regards ensuring adequate and stable energy supplies, another long-term factor for economic growth, the Abe government seems intent on reopening nuclear plants post-Fukushima over the next two years even though more than 50% of Japanese strongly oppose this move (of which most are women). Although costs of petroleum imports have soared since the plants were shut down, Japan has done rather well without nuclear power as people and corporations have made adjustments in order to lower levels of demand. There have been no major industrial failures.

The remarkable resiliency to adversity evident in the reactions of Japanese following the Fukushima disaster and the 2011 Great Northeast Japan earthquake is a useful reminder of the several strengths that are often ignored by more casual observers of Japan and the Japanese.

For example, while the Abe government rightly believes educational reforms are needed to raise standards at the university level (students once admitted are almost guaranteed a degree), the OECD's recent PISA rankings of 15 year old students globally listed Japan in #4 position overall, #2 in mathematics and #1 in reading.

Many close observers of Japan believe young people and women will be the real "change agents" in the years ahead.  Japan's youth are looking for opportunity and are ready to be more entrepreneurial than their elders, are anxious to learn English and to travel and study abroad.  There is also enormous potential in the increasingly outspoken ranks of the many educated women who are increasingly seeking work with foreign companies and forsaking married life for careers since society offers so little middle ground.

Ultimately, the rise of China is the  game changer that may at last be spurring on the Japanese to undertake the reforms they have spurned during their easier years of economic dominance in Asia.

Troubled Security Horizon Poses a Real Challenge

While Abe's priority is to get the economy up and running strongly again, there is a danger that his nationalist agenda is working at cross purposes with his economic goals.  Japan's economic success depends significantly on economic and trade linkages with its Asian neighbours, particularly China and Korea in Northeast Asia.

Although Abe's security plans may seem reasonable on the surface, such as giving its military forces the legal right to participate in collective defense arrangements, which other countries can do, the nationalist rhetoric and reminders of history (such as the PM's December visit to the Tokyo shrine where war combatants are remembered including those designated as war criminals) are not helpful.

Conflicting claims over maritime territory with both China and Korea have become flashpoints, particularly serious in the case of China where a military confrontation or major incidents at sea could trigger hostilities between these major powers.  The relationship between Japan and Korea, both US allies, is at its lowest point since the establishment of relations in 1964.

China's huge economy will always be very important to Japan's economic performance.  Nonetheless, Japan has been cultivating ASEAN countries to compete with Chinese influence in the area, while over the past few years Japanese businesses have shifted their new investment flows quite markedly away from China to ASEAN destinations.  Japan also is also strengthening its ties with India.  Even the Japan-Russia relationship, long troubled by Russia's occupation of Japan's "Northern Territories" since WW2, is showing signs of life.

In Sum:  Prime Minister Abe's Dual Challenges for 2014

First, he must continue to bring economic growth back to 2% or better levels and set the stage for longer-term economic strength through opening the fight on government indebtedness and marching ahead with real reform. He will try to build on the successes scored in 2013.  The outcomes of the TPP talks, especially their impact on agriculture, will be a big leading indicator.

Second, and more problematically, he will need to manage the troubled relations with China and Korea in such a way that Japan avoids major confrontations, particularly over territorial issues, while reassuring its neighbours (and others) of Japan's reasonable needs in terms of defending the nation.  A good start would be to try and temper nationalist rhetoric while developing closer personal ties with President Xi of China and President Park of Korea.

Through 2013, Prime Minister Abe demonstrated a more pragmatic approach to governing than he did in his first term when he was much more rigid in pursuing his nationalist and economic agendas.  He lasted less than a year in power.  With the levers of power now more securely in his hands than they were in 2006, it will be interesting to see which Abe shows up in 2014.

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