Barely hours after the news that Japan is entering a recession, with an annualized GDP drop of 7.3% in the second quarter and 1.6% in the third quarter, prime minister Shinzō Abe (安倍 晋三) has announced snap elections that will be held sometime in mid-December.
Ostensibly, Abe’s rationale is his determination to postpone the next installment of Japan’s consumption tax increase, which jumped from 5% to 8% in April and is set to rise further to 10% in 2015.
But that’s an obvious fig leaf — the consumption tax is the legacy of the opposition government that Abe defeated in his landslide victory in December 2012.
Instead, Abe hopes to maximize his government’s relative popularity and to take advantage of a scattered opposition to win a rapid mandate next month and extend the LDP’s control for another four years instead of waiting to face voters in 2015 or 2016, when the opposition could be stronger and when Abe’s policies might be even less popular. Abe also faces an internal LDP presidential election next year — it will be hard for rivals to attack Abe so soon after a successful election victory.
Ultimately, however, the election is also a referendum on ‘Abenomics,’ the most audacious experiment in neo-Keynesian economic policy today.
Abenomics meets Abepolitik
Abe, formerly prime minister between 2007 and 2008, led the Liberal Democratic Party of Japan (LDP, or 自由民主党, Jiyū-Minshutō) to a resounding victory two years ago on the basis of remarkably aggressive economic policies designed to pull Japan out of what’s been an essentially two-decade period of slow growth.
His government soon introduced a program, popularly known as ‘Abenomics,’ of fiscal stimulus amount to ¥10.3 trillion ($116 billion), and Abe quickly appointed Harhuiko Kuroda (黒田 東彦) as the new governor of the Bank of Japan, where Kuroda has pursued an equally aggressive monetary policy that’s boosted the money supply in Japan, thus lowering the value of the yen, but also reducing the risk of deflation. The latest slide back into recession, however, has caused many global economists to doubt the efficacy of Abenomics.
Economic turbulence and a series of familiar scandals within the LDP, which has governed Japan throughout almost the entire postwar period, have lowered Abe’s approval ratings. Nevertheless, most polls show that more Japanese voters still approve of Abe’s performance than disapprove.
Moreover, with no organized opposition party prepared to contest snap elections on such a sudden timetable, Abe is in a strong position to gain seats in the House of Representatives, the lower house of Japan’s parliament, the Diet (国会). The Liberal Democratic Party currently controls 295 out of 480 seats and, with its conservative Buddhist ally New Kōmeitō (公明党, Shin Kōmeitō), controls 326 seats in total.
If Abe wins a new mandate, it will be his third consecutive victory, following a similarly strong finish in the July 2013 elections to select one-half of the House of Councillors, the upper house of the Diet.
Abe’s opposition is fragmented and weak
The opposition Democratic Party of Japan (DPJ, or 民主党, Minshutō), which cycled through three different prime ministers when it governed between 2009 and 2012, has stagnated in opposition. it’s not today a credible challenger to Abe, who has held the premiership for a longer period than any prime minister since Junichiro Koizumi (小泉 純一郎), the popular reformist who reorganized Japan’s postal savings system and pushed to liberalize the Japanese economy.
The rest of the opposition is in even worse shape. In 2012, an alliance between the right-wing, nationalist former Tokyo mayor Tokyo governor Shintaro Ishihara (石原慎太郎) and Osaka mayor Tōru Hashimoto (橋下徹) seemed to pose the greatest potential threat to Abe’s plans. But Hashimoto’s controversial statements about ‘comfort women’ and his otherwise uneven performance (he forced a needless reelection over his plans to combine Osaka city and prefecture government in March) have dented his star power, and his alliance with Ishihara disintegrated over the summer.
Hashimoto forming a new party, the Japan Innovation Party (維新の党 Ishin no Tō?) in its place, and it’s still the third-largest bloc in the House of Representatives. But Hashimoto’s party is set to lose much of its support, according to current polls.
Even within the LDP, which is well-known for its factional divides, Abe faces few challengers. That’s in part because he wisely appointed former prime minister (and potential rival) Tarō Asō (麻生 太郎) as his finance minister in December 2012. But former foreign minister Nobutaka Machimura (町村 信孝), an economic liberal, and the pro-China former finance minister Fukushiro Nukaga (額賀 福志郎) lead two LDP factions from which they could launch challenges if Abe stumbles in the snap elections. Shigeru Ishiba (石破 茂), who lost the 2012 LDP leadership race to Abe, despite his youthful and charismatic appeal, currently serves as the LDP secretary-general, and assumed a cabinet portfolio for regional economic matters in a September reshuffle.
Despite Abe’s popularity, he is keen on taking two policy steps about which Japanese voters remain highly skeptical — restarting Japan’s nuclear energy reactions (just three years after the Fukushima meltdown) and changing Japan’s constitution to allow for a more aggressive military presence in east Asia.
A referendum on Abenomics (and Keynesianism)
But Abe’s first task will (still) be to pull the Japanese economy back into expansion. If Abenomics continues to stall, Abe and the entire LDP stand to lose a great deal of policy credibility.
There are a diverse array of views on Abenomics among experts, but they essentially fall under three general categories.
One school of thought argues that Abenomics is working, and the Abe and Kuroda should push on with their bold experiment while delaying or cancelling the consumption tax increase. Though the economy is officially in recession, the trend is heading back toward growth. The consumption tax hike explains much of Japan’s economic stumble, and economic slowdown in China, Japan’s largest trading partner, has also complicated Japan’s growth. The weakening yen is making Japanese exports more competitive globally, and it’s the European Union (and not Japan) where deflation fears currently run strongest.
The other school of thought argues that Japan’s unemployment rate, just 3.6%, is already low, and that no amount of boosting the money supply will move Japan’s economy, because it has a shrinking population and, already, one of the world’s oldest populations. In other words, you can’t squeeze more demand out the demographic stone — the Japanese workforce is shrinking and graying, and no amount of monetary easing or government spending will alter that reality.
Another school argues that Abenomics can’t cause a fundamental transformation of the economy because it’s incomplete. Fiscal and economic stimulus represent the ‘first’ and ‘second’ arrows of Abenomics, but Abe has been far less successful with the ‘third’ arrow of Abenomics, a series of promised economic reforms that would have largely picked up where Koizumi stopped — more deregulation, labor market liberalization, and a new Japanese corporate governance law.
The results of Abenomics have important global implications, and not just because Japan represents the world’s third-largest economy. The novel economic experiment is as much of a pure test as neo-Keynesianism might ever have in a real-world policy setting in the 21st century. So its success or failure will be vital to future narratives in the United States, Europe and elsewhere about the efficacy of growth-oriented, ‘Keynsian’ economic policy.