Challenges of retaining a legacy: As Abe leaves, Abenomics will remain

Komaki Fujii opened her central Tokyo vegetarian restaurant in 2013, when the future looked bright. Shinzo Abe, Japan’s prime minister, had just taken office promising a bold package of reforms that would supercharge the country’s stagnant economy and transform the way it did business. Now, Abe is preparing to step down with many of those promises unfulfilled. That will make it even harder for Japan to recover from the impact of the coronavirus, which has sent the world’s third largest economy after the United States and China shrinking at its fastest pace since World War II.

Abe’s successor will face Japanese voters and businesspeople who have seen the hard-won economic gains of the last eight years slip away in the face of the pandemic. Many will wonder whether Abe’s promises, so tightly identified with him that they came to be known as Abenomics, ever changed much at all. While Fujii does not blame her current hardship on Abe — the whole world is facing a devastating economic crisis — she is unsure whether he deserves much credit for her prior success.

“I don’t know if Abenomics was the right answer,” she said from her shop in the Akihabara district, which until the coronavirus struck had been packed with tourists and businesspeople hungry for dishes like fried noodles. But when it comes to her own business, she said, “there’s nothing you can really point to and say, ‘That was great.’”

The conservative, governing Liberal Democratic Party is due to choose a replacement for Abe in September. It is likely to stick with some version of his namesake economic policies, which called for making money cheap and readily available, amping up government spending and transforming the way the country’s bureaucracy and corporations did business. “Abe’s resignation happened so suddenly that no one has an agenda, has a strategy, has thought about how they’re going to run this government,” said Gerald L Curtis, a professor emeritus of political science at Columbia University.

“They’ll try to do things to get the economy coming back after it’s been hit so hard,” he said. “But new ideas? New policies? I don’t think so. It will be a continuation of Abe’s policies, no matter who it is.” Those policies have had a mixed record. “The market is up, the unemployment rate is low, so that’s a good thing for the economy,” said Nobuko Kobayashi, a partner in Tokyo with the Japanese arm of consulting firm Ernst & Young. “That said, it’s very hard to single out Abe’s contribution.” On the plus side, Abe’s appointments at the country’s central bank kept borrowing costs low and flooded the economy with yen, Japan’s currency. That helped the country shake off decades of economic stagnation and prop up its stock market. Other efforts were less successful.

Japan remains a wealthy country and an export powerhouse, but it faces long-term challenges. It has the largest public debt in the developed world when compared with its economic output. It has a shrinking, aging population that will increasingly test the country’s social safety net. Those concerns clouded Abe’s pledge to stimulate growth through government spending. While he pumped money into the economy, he also sought to keep the country’s debt burden in check with two consumption tax increases. Both times, the move set off a downturn.

His promise to introduce much-needed structural reforms — fundamental changes to the way Japan does business — also fell short of expectations. He expanded women’s participation in the work force but did little to improve their status there. And his efforts to relax a rigid labour market and shake up Japan’s cushy corporate boardroom culture, which has kept Japanese companies and industries less profitable and efficient, made limited progress.

“When it comes to work style change and faster introduction of digitalisation, the shock that came from corona probably made a bigger impact” than Abe’s policies, said Takuji Okubo, the North Asia director of the Economist Corporate Network. With the economy in crisis, Japan’s next leader “needs to move in a different direction,” he said. “The next prime minister will not be able to use monetary policy that much. The room for further expansion, for further easing, is very limited.” When Abe began his tenure, Japan’s economy was in the doldrums after decades of economic stagnation and the double crisis of the 2011 earthquake and nuclear meltdown in Fukushima.

Soon after taking office, he championed an aggressive monetary policy that kept interest rates low, injected huge amounts of cash into the country’s markets and maintained the yen at a level that made Japanese goods affordable for foreign buyers. He matched that with big government spending centred on preparations for the 2020 Tokyo Olympics. As money flowed into the economy, unemployment went down and tourism, investment, real estate prices and the financial markets went up.

Beyond Japan’s borders, Abe worked to increase access to foreign markets and lower tariffs. When the Trans-Pacific Partnership, the largest trade accord in history, collapsed after the Trump administration’s withdrawal, Abe helped rally the remaining members to reach their own trade accord. His efforts benefited from timing. China’s economy surged during his tenure, increasing its appetite for Japanese machine tools and the specialised components needed to manufacture things like autos and high-end electronics. Chinese tourists, eager to spend their growing wages, flooded Japan’s cities and tourist sites, splashing out on luxury goods.

But late last year, Japan’s economy began to contract as slowing global demand and the trade tensions between the United States and China cratered Japanese exports. Japan’s national debt stood at one and a half times its annual economic output, and in an attempt to pay it down and shore up funding for social programmes, Abe pushed through a 2-percentage-point increase in the consumption tax. As prices went up, consumers began buying less. Then a vicious typhoon devastated the country’s center, piling on the damage.

By the time the pandemic was underway, the economy had already sunk into recession, defined as two consecutive quarters of negative growth. The coronavirus brought it crashing down, forcing Abe to postpone the 2020 Summer Olympics, zeroing out tourism and taking an even larger scoop out of domestic consumption as people, wary of the virus, stayed home. Growth nose-dived by an annualised 27.8 per cent during the second quarter after a national emergency that spanned most of April and May. The Japanese government met the crisis with a stimulus package valued at around 40 per cent of the country’s GDP, including low interest loans and cash handouts.

Economic indicators showed modest improvement in June, but consumption has receded again after a second wave of the virus hit the country, forcing some local governors to declare a state of emergency and pushing Tokyo to ask bars and restaurants to reduce their hours. Analysts hold out little hope that the new government will take bold action to meet the pandemic’s challenge. Abe has no clear successor. And although his policies have failed to live up to their promise, none of his possible replacements have offered up an alternative.

“Short term, the No. 1 priority of the new prime minister is going to be to consolidate power and to ensure that the markets and the economy stay well supported,” said Izumi Devalier, the chief Japan economist at Bank of America Merrill Lynch. That, she said, “means continuation of the status quo.”