Abenomics: is Japan’s economic diplomacy back?

Since his election in December 2012, Prime Minister Abe has been traveling much of the world arguing that “Japan is back”. It’s too early to say if this is really the case or a positive spin to what is seen as Japan’s gradual marginalization on the international stage. If, on the one hand, the economic indicators seem to point in Abe’s favor (2.6% annualized GDP growth), on the other hand the continuing problems at Fukushima and Japan’s reluctance to reform domestically send a different signal.

The country’s bold new economic policy – known as “Abenomics” – has attracted great interest at home and abroad. With the victory of Abe’s LDP party in the Upper House elections in July, the Prime Minister now has more leverage to try to reverse Japan’s chronic economic underperformance of the last twenty years. 

The Liberal Democratic Party exerts control over both houses of parliament, a situation unseen in recent years. With no national election scheduled for the next three years, Prime Minister Abe has the possibility to execute long-term economic reforms and promote economic competitiveness in an unprecedented way. However, Abe’s political sway must be reconciled with voters’ apathy (a mere 53% turnout in the latest election) and a growing sense of civil unease especially after the recent news of a 300 ton leak of contaminated water from the crippled Fukushima nuclear facility.  

For Abe restoring nuclear power is a vital part of the grand project to revamp the economy. The other highlights of Abenomics are monetary easing, fiscal policy and structural reform – all intended to spur domestic growth. Whilst the first two points were announced in the spring, the third has been kept in the pipeline until recently.

Through quantitative easing, the Bank of Japan aspires to an ambitious goal of raising the inflation rate to 2% within two years  The inflow of capital into currency markets has had the desired effect of undervaluing the Yen which since December  has plunged 14% versus the US dollar to a four-year low against the US currency.   For an export-driven economy, this means making Japanese companies more profitable and more competitive internationally.

The second point, Japan’s stimulative fiscal policy, might be a cause for concern. Japan is the most heavily indebted nation in the industrialized world with a debt-to-GDP ratio now nearing an extraordinarily high 245%. The Bank of Japan is buying government bonds hoping private institutions will put the money back into the economy. To temper the government’s inability to service its debt, a two-stage hike in consumption tax from 5% to 8% and then to 10% is planned from April 2014.

The final highlight of Abenomics rests on structural reforms: grappling with an aging population, increasing female participation in the work force and determining Japan’s future energy supply. Reforms in these areas are likely to be slow since most attention will be devoted to opening up deregulated and lightly taxed zones around the country to boost foreign direct investment. Measures to revitalize Japanese industry include promotion of capital investments and venture capital, the restructuring of industries characterized by excessive competition in order to strengthen international competitiveness by enlarging the size of Japanese businesses through greater ease for mergers and acquisitions, and regulatory reform.

These domestic challenges intersect a series of international issues, as a possible fast track to force economic reforms upon the country rests with Japan’s trade partners. In this context, Abe does seem to have ushered in a renewed international role for Japan.

His foreign policy seems to be centered on proactive economics and trade diplomacy, creating ambitious Free Trade Agreements (FTA) and capitalizing on investment opportunities abroad.  For instance, Abe has played a prominent role in promoting reactor exports as his government sees significant market opportunities in exporting nuclear power plants. Abe flew to Istanbul at the beginning of May to sign an agreement worth $20 billion for Mitsubishi Heavy Industries to build Turkey’s second nuclear-power plant. As Japan is at the nexus of the global nuclear industrial complex, a priority is trying to export its know-how and technology. Turkey is just one example of what the future might hold for Japan’s export industry. The Prime Minister is hoping to replicate similar contracts in the Gulf region and in Asia.

Abe also traveled to Washington in March to officially announce his country’s decision to join negotiations for the Trans-Pacific Partnership (TPP) a wide ranging free-trade agreement that would include the US and 10 other Asia-Pacific nations (but not South Korea and China, at this stage). The TPP should act as a force against Japanese protectionism and spur domestic transformation to reduce inefficiencies and regulations. Japan’s decision to join negotiations led by the US also sends a strong message to its East Asian neighbors, especially China. Japan is proactively seeking other paths than regional cooperation in an exclusively Asian framework – which by definition would discriminate against the US. Despite his optimistic public announcements abroad, Abe will have to fight the interest groups within his party that are resisting change.

Given the LDP’s historical ties with big businesses, utilities companies, industry lobbies and the bureaucratic machine, areas that most need an overhaul such as medical services and agriculture will be the hardest to reform.

Almost in concurrence with the decision to join TPP negotiations, Japan also announced the first round of negotiations to create an FTA with the European Union. After almost two years of consultations and a “strategic dialogue” that spans more than a decade, Japan’s decision in April to push forward on a proposed trade agreement with Brussels signals once more a new economics-first diplomacy. Lifting entry barriers for Japanese carmakers in the EU are amongst the issues that might stall the agreements in the future.  Many other questions remain unanswered especially as regards the timeframe for completion. Whilst the TPP could potentially be concluded in 2014, Japan–EU negotiations are expected to last three to four years and most likely beyond Abe’s term as Prime Minister.

Overall, internationally speaking, Abenomics is long-term, proactive and ambitious. It indicates a return to a time when Japan’s trade diplomacy ran on par with its international economic stature. The results are far from assured but the effort testifies to a more assertive and possibly more influential Japan on the world scene.

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