Shinzo Abe’s Legacy

By Ichiro Suzuki

On August 28, Shinzo Abe, Japan’s prime minister since December 2012, has announced that he is stepping down for health reasons. He has served as the country’s prime minister longer than any of his predecessors. Always under intense attacks from the media, his eight years went with a fair share of scathes. Nonetheless, he is leaving the office with a number of accomplishments behind him. 1. Abe upended drifting of Japan’s politics and restored political stability. This stands in contrast to the rise of populism both on the right and the left in Western democracies. In Japan, left-leaning populists did rule the country between 2009 and 2012, showing little competence in both in management of the economy and foreign policy. Shinzo Abe’s return to power at the end of 2012 had turned this around. His government stayed remarkably stable and durable in a country where a duration of a prime minister is often 2 years or maybe less. In fact, during Bill Clinton’s eight year presidency between 1993 and 2001, eight men occupied the post of Japan’s prime minister. During the six-year period prior to Abe’s return at the end of 2012, six prime ministers came and went including Abe himself for twelve months through September 2007. 2. Abe lifted the Japan out of persistent mild deflation that plagued the economy since the mid-1990s in the aftermath of the burst of the infamous Japan Bubble in the late 1980s. While Abenomics consisted of aggressive monetary easing, fiscal stimulation and structural reform, it was printing money that really mattered. Aggressive quantitative easing allowed the overvalued Japanese yen to fall against the U.S. dollar. A weaker currency lifted inflation expectations through higher (expected) import prices. Inflation never rose anywhere close to the 2% target. Nonetheless, it stayed steadily above zero though less than 1%. Renewed inflation expectations salvaged the values of deeply depressed asset prices, unleashing a boom in real estate and stocks in early years of Abenomics. This is a dubious distinction but Japan has pioneered in putting modern monetary (MMT) into practice, long before Abe’s return. A country that can borrow in its currency could keep printing money indefinitely, as this theory goes. In an era when both the banking system and Corporate Japan were recapitalizing their balance sheets and hence there was little bank loan demand, the public sector took up the task of boosting demand on borrowed money. The Japanese government succeeded in saving the economy from tumbling into a sharp contraction, even at the price of taking outstanding debts to a terrifying over 200% of GDP. On top of it, Abenomics added aggressive purchasing of outstanding government debt by the Bank of Japan in order to suppress interest rates. Despite the unprecedented level of debt, the government’s borrowing costs for ten years remained at zero. Collapse of the bond market and the currency or inflation which pundits have long forecast still shows little sign of happening. Stability of the bond market despite mounting debt is both a blessing and a curse. There is no borrowed money that doesn’t have to be repaid. So we will still see what happens in a much longer term. That said, there is little sign of a paradigm shift in the bond market, at least not yet. In the final months of Abe in office, the entire world began to follow footsteps of Japan, amid a coronavirus-induced deep recession. Governments around the developed world rushed to expand fiscal policy in the face of collapsing demand, issuing a large amount of debt securities that are then aggressively bought in the market by the central banks. Japan’s debt to GDP ratio, that became stable during the Abe years thanks to higher nominal economic growth rates due materially to the end of deflation, began to rise again. 3. There has not been not so much erosion of social cohesion despite a quarter century of economic stagnation, and this did not change much in Abe’s eight years. Japan is not as divided as the U.S. or other western democracies. An income gap between the rich and the rest grew in concert with the global trend. Inflows of immigrant workers and Corporate Japan’s loss of prominence in the global markets made life of lower income people difficult. The unemployment rate did not rise significantly above 5% even at the nadir of an economic downturn. (5.5% in 2002 was the highest after WWII.) The rich grew far less richer than those elsewhere, especially in the United States, thus causing less anxiety among the have-nots. All of these worked to prevent significant social division that has been witnessed in Europe and the U.S. The unemployment rate stood at 2.8% in the middle of the coronavirus-induced recession. 4. On the domestic front, Abe’s policies were surprisingly liberal. He tried to uplift the standing of women both in the society in general as well as in the corporate world, in a persisting male-chauvinist culture. He was aware that the key to lift Japan’s depressed growth potential was to raise the extremely low birth rate. While his push boosted subsidies to day care center construction, it was far short of changing a deep-rooted culture. Nonetheless, an important baby step was taken at least. Boards of publicly traded companies have witnessed the rising number of non-executive and or female directors. Abe has taken a step to bring Japan’s corporate world to embrace greater shareholders capitalism through enhanced corporate governance, away from excessive stakeholder capitalism that has ruled Corporate Japan, a polar opposite move that American capitalism is trying to make. 5. Abe boasted of stunning foreign and national security policy successes during the eight years, lifting Japan’s diplomacy from doldrums during the period of six PMs in six years. Former “The Economist” editor-in-chief Bill Emmott says "Recognizing that America has become a less reliable and cooperative ally, especially under Trump, Abe has prepared the ground for Japan to develop a more independent voice as it builds its own network of partners around the world. That strategy is here to stay.” Abe restored Japan’s damaged credibility in the U.S. - Japan security relationship under the Obama presidency. He has maintained a good relationship with Donald Trump, who is a great deal more difficult to deal with than his predecessor. Under the security pact, and in the face of China’s growing assertiveness in the East Asia Sea, Abe had a new national security law legislated that stipulates collective self defense with an ally. He has become the face of Japan, after the country drifted faceless for years. On top of it, Abe’s foreign policy/ national security accomplishments include the following: -Salvaging the 11-country Trans Pacific Partnership (TPP) after the U.S. withdrawal from the trade pact -Bilateral free-trade agreement with the EU -Bilateral free-trade negotiation with the UK (almost reached) -Strengthened Japan’s defense relationship with India -Reached a deal with South Korean President Park on WWII comfort women -Legislated Specified Secret Protection Law Politics in Japan yet again enters a period that is far from certain. While too many people and the media took the pleasure in bashing Abe, stability in his eight years is likely to be missed.

About the author: Mr. Suzuki is a retired banking executive based in Tokyo, Japan.