Japan’s early election puts its economic recovery at risk
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JAPAN’S economy has been so sickly for so long that many have stopped looking for signs of recovery. And yet, on close examination, they are there. Years of massive fiscal and monetary stimulus seem to be having some effect. Unemployment is below 3%—the lowest rate in 23 years—and wages are rising, at least for casual workers. Prices are creeping up, too, albeit by much less than the Bank of Japan’s 2% inflation target. To outsiders, this may sound underwhelming. But for a country that has suffered from almost 30 years of on-and-off recession and deflation, it holds out the prospect of deliverance. The past 18 months of modest expansion constitute the longest stretch of uninterrupted growth in more than ten years.
The architect of this semi-revival, Shinzo Abe, has been prime minister for nearly five years—close to the record for the era since Japan’s massive asset-price bubble burst in 1990. This week he called a snap election, with the vote set for October 22nd. The result is not really in doubt: it would be an astonishing reversal if Mr Abe’s Liberal Democratic Party (LDP), which currently holds a two-thirds majority with its ally, Komeito, did not lead the next government. But a series of scandals have sapped Mr Abe’s authority, and he may face more competition than he was bargaining for. Politics could yet derail the tentative recovery, leaving the world’s third-biggest economy in the mire once more.
Throughout his tenure, Mr Abe has procrastinated over critical but unpopular reforms intended to keep the economy upright when the fiscal and monetary support is eventually withdrawn. He still promises to curb the unsustainable pension system, to open sheltered industries to competition, to make it easier to dismiss salaried employees, and so on. And there have been plausible reasons for delay. Both politically and economically, it made sense to wait until a recovery was under way before administering unpleasant medicine.
Abe’s bad habits
But politics now appears to be compounding Mr Abe’s timidity. He called the election more than a year ahead of schedule, presumably on the assumption that his prospects were not likely to improve over the next 14 months. One concern is the formation of the Party of Hope, led by the governor of Tokyo and recent defector from the LDP, Yuriko Koike. The new party will subsume the Tokyo-based one she led to a resounding victory over the LDP in local elections earlier this year. It is in effect absorbing the party that currently serves as the main opposition, the Democrats, thereby uniting Mr Abe’s chief adversaries (see article).
As it was, Mr Abe hardly seemed to be preparing voters for unpopular economic reforms. He has been talking about the economy on the stump, but only to promise extra spending on various things, including pensions. He readily admits that he is more interested in amending the pacifist constitution than in mending the economy, and that structural reform is simply a means to restore Japan to greatness.
The election may make things worse, if it ends up sapping Mr Abe’s authority, and with it his enthusiasm for reform. At the very least, the LDP seems likely to lose a few seats, simply because its current majority is so big. If the losses are bigger than expected, ambitious underlings in the LDP may try to eject Mr Abe as leader of the party.
But however big the LDP’s majority, and whoever ends up in charge, it would be a grave mistake to leave the job of reviving the economy half done. Fixing things will only get harder as time passes. As it is, public debt is over 250% of GDP. The population is ageing and the workforce shrinking—drags on growth that will grow ever heavier.
North Korea’s warmongering may have shifted some voters’ attention from the economy to national security. This plays to Mr Abe’s strengths: in dealing with Kim Jong Un, Japan needs a forceful leader who works well with its difficult ally, Donald Trump’s America. However, in the long run, a failure to avert economic decline will pose as great a threat to Japan’s security. The economic malaise has lasted for so long that many voters and politicians may think they can live with it. But big budget deficits and loose monetary policy can only paper over the problem. In the meantime, the opportunity to fix things without great upheaval is slipping away.