Japan won’t be swaggering on the world stage any time soon

While Fumio Kishida’s approval rating has dipped dangerously, the lack of a capable opposition means he is unlikely to lose his premiership
However, expectations for his time in office are low as a looming recession, inflation and absence of needed reforms are sapping what little political capital he has

William Pesek

Published: 9:30am, 8 Dec 2023

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Japan’s political establishment is seeing a bull market in déjà vu as pundits speculate on whether Prime Minister Fumio Kishida’s days are numbered. With approval ratings as low as 21 per cent, Kishida makes US President Joe Biden seem almost beloved by voters.

That is well below the 30 per cent threshold that tends to represent the danger zone for Japanese governments. Seven of the last nine governments have lasted roughly one year. So will Kishida be shown the door in short order? Not necessarily.

Despite his extreme unpopularity after 26 months in office, Kishida benefits from opposition parties in disarray. This, by default, gives his Liberal Democratic Party (LDP) a firm hold on power. But Kishida has an increasingly weak hand for tackling the troubles facing Asia’s second-biggest economy.

The most immediate threat is another recession. The 2.1 per cent contraction in the July-September period year on year comes as China’s economy slows and elevated US bond yields send headwinds Japan’s way. In other words, further shrinkage in the October-December quarter seems likely.

This explains why Japanese voters are in a dark mood as 2024 approaches. Even worse than a recession, Kishida confronts the risk of stagflation as consumer prices rise faster than gross domestic product or wages.

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This might sound better than the deflation of the last 20-plus years. For some economists, the fact that inflation is now above Tokyo’s 2 per cent target is a victory of sorts. The trouble is that it’s “bad” inflation. It’s being imported thanks to high energy and food prices via a weak exchange rate.

For decades, the Bank of Japan (BOJ) flooded markets with yen in hopes of generating “demand pull” inflation as companies fatten pay cheques. Instead, Japan is getting the “cost push” kind that dents consumer confidence.

Kishida is now suffering from the cumulative fallout from 11 years of LDP promises to upend Japan’s economic model with bold structural reforms. It started in December 2012, when Shinzo Abe led the LDP back to power.

Abe captivated the world with ambitious plans to cut bureaucracy, rekindle innovation, loosen labour markets, empower women and re-establish Tokyo’s place at the centre of Asian influence. But “Abenomics” was more bait and switch than Big Bang. Abe let the BOJ take the lead with aggressive easing, figuring that would be enough to kick off a virtuous growth cycle.

Even the reform victory for which Kishida’s party deserves credit requires an asterisk. Yes, the LDP strengthened corporate governance, prodding CEOs to increase returns on equity and diversify boardrooms. Those upgrades helped drive the Nikkei Stock Average to 33-year highs last month.

What they didn’t do, though, was incentivise companies to share record profits with workers. The spoils tended to go towards dividends for investors. Abenomics, in conclusion, reminded us that 1980s-style “trickle-down economics” still doesn’t work.

Since taking office, Kishida promised to launch a “new capitalism” model to enrich the middle class. Nothing has come of it, explaining why his support rates are falling faster than GDP. This predicament is bad news for a global economy that needs all the growth engines it can find.

China, of course, is facing its own Japan-like lost decade problem, not from bad loans in the banking system but a property sector ricocheting from default to default. Europe, led by a slowing German economy, is not the economic shock absorber the world needs today.

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Japan, the world’s third-biggest economy, is either currently in or on the verge of yet another recession. A more vibrant Japan would be a decidedly welcome development in Asia. Yet Kishida has little, if any, political capital left to carry out the upgrades needed to resurrect Japan’s animal spirits.

Any real clout or leverage he would need to level competitive playing fields, increase productivity, enliven entrepreneurship or take on the Tokyo patriarchy is vanishing with each drop in the polls. The same goes for Kishida’s latitude to address the fiscal fallout from a fast-ageing population or alter the tax code to attract more overseas companies and talent.

The costs of this are rising as the BOJ remains stuck in quantitative easing quicksand. Japan’s central bank is trapped thanks to a change-averse political system that treats the symptoms of Tokyo’s malaise, not the causes. Any step away from quantitative easing could slam the banking system and send the yen skyrocketing, adding to Japan’s 2024 challenges.

All this hurts Japan’s global standing and its soft power. A more dynamic economy would afford Tokyo increased swagger in world affairs and greater leverage. It would add heft to Kishida’s ambitions to remind China that Japan remains a force with which to reckon in trade and finance.

Japanese Prime Minister Fumio Kishida (right) and South Korean President Yoon Suk-yeol (left) pose for a photo while wearing Stanford baseball caps with former US secretary of state Condoleezza Rice during a summit on the sidelines of the Asia-Pacific Economic Cooperation summit in Stanford, California, on November 17. Photo: Reuters

Kishida’s weakness is a blow to efforts by Tokyo and Seoul to mend fences. It hardly helps that South Korean President Yoon Suk-yeol’s approval ratings are in the low 30s as he also dithers on economic retooling. Both leaders’ unpopularity raises questions about the durability of any detente.

The real disappointment might be in Washington. Biden had hoped a more confident Japan would be a bulwark against an increasing assertive China, but Kishida’s weakness at home has clipped his diplomatic wings abroad. Though Kishida is endeavouring to boost Tokyo’s military spending, a more economically confident Japan would arguably pay much bigger dividends.

Kishida might indeed survive 2024. However, hopes for a more vibrant and self-assured Japan on the world stage are diminishing along with Kishida’s standing among Japanese voters who expected more.

William Pesek is a Tokyo-based journalist and author of “Japanization: What the World Can Learn from Japan’s Lost Decades”