#2 Suga becomes New PM of Japan & way forward with 'Suganomics’
HIGHLIGHTS: 15th, Sep -30th, Sep.
Yoshihide Suga becomes the PM of Japan, winning a landslide victory in Liberation Democratic Party’s presidential elections. He succeeds Shinzo Abe and promises to carry out his major policy initiatives.
Amidst pandemic situation and poor economy, Suga faces daunting challenges like issues with hostile North Korea, including relationship with assertive China, establishing good relationship with winner of the US presidential elections & what to do about Tokyo Olympics.
The prescriptive remedy for Japan’s economic growth as recommended by experts are: broad range of structural reforms, productivity-enhancing labor-market and regulatory reforms.
The future of Japan will depend on the course new leader will take. Will Suga be the falcon leader or another short-term PM of Japan?
Pandemic should be treated as a new opportunity to rebuild a sustainable economy that is environment friendly & employs green infrastructure. Will Japan play its cards right?
1. Who is Suga?
It is interesting to note the raise of Yoshihide Suga, who comes from a humble family background and has no political lineage in contrast to his predecessors who were political elites. Suga strived hard to get graduated, worked 9-5hrs job, went on to etch his own political career from being a winner at the city council elections, being a secretary for an LDP lawmaker, becoming a cabinet secretary and finally succeeding Shinzo Abe to become Japan’s Prime minister.
This self-made man goes by the motto “Where there is a will, there is a way.”
Let’s have a Glimpse at Suga’s life:
Japan is one of those democratic nations like India where citizens have a say in whom and how they want to be governed. In the recent unexpected elections, Suga was elected by the Parliamentarians which means people had less or nothing to do to express their choice in selecting their national leader. Will Suga who won favor of political leaders also be able to win people’s favor in the 2021 elections?
As on September 2020, cabinet support rate for Suga is 65%.
Image courtesy: public opinion poll; Asahi Shimbun
2. What will be the course of ‘Suganomics’?
This strong headed man had prodded Japan’s bureaucrats and changed policies hitherto regarded as untouchable. He is to be solely credited for bringing the boom in Japan’s foreign tourism by easing restrictions on visa. By bringing in massive change to dam-use regulations that were linked to complicated issues concerning ministerial jurisdictions, he enabled policymakers to prepare better for natural disasters.
Suga has sworn in power by promising to continue Abenomics and other key policies of his predecessor. He would prioritize reviving the economy over tackling debt and fighting challenges put forth by the pandemic. Also he is targeting at implementing structural reforms through mixed bag of policies that would give immediate returns unlike Abe, who had long term growth strategy. From plans to revamp government’s digital infrastructure by creating new agency to letting new competitors enter heavily regulated sectors such as mobile telecommunications and agriculture, Suga seems to be an audacious leader than what he was earlier perceived to be.
Tasks Ahead:
3. What are the Implications of pursuing Abenomics?
Let’s hear from the brain behind Abenomics himself about the progress and failure points of the much-acclaimed monetary policy that was aimed at pulling Japan out of deflation.
In an interview with Asahi Shimbun, Mr. Honda, the brain behind Abenomics & special advisor to the Abe’s cabinet during 2012-2016 accepted that intended results are yet to be achieved and has summarized the progress of 7 years and 8 months of Abe’s administration as below :
“Abenomics was structured to hit the goal of overcoming deflation through 3 arrows: monetary easing, flexible fiscal stimulus, growth strategy. The results are mid-way. The basic philosophy behind Abenomics was to change people expectations about future. It was intended to boost aggressive consumption & investment behavior.
Say, if the sales of a company increase, it could return it as capital investment and wages which will further increase consumption by a cycle. For this I advised Abe to go on with bold monetary easing &achieve lateral support through fiscal mobilization. In April 2013, with the governor of Bank of Japan introducing a different dimension of relaxation, it only led people feel different about the current policy. Because in past it was in small amounts &behavior of people began to change. Thereby it was not possible to escape the deflation”.
On introducing different dimension of relaxing, Bank of Japan targeted to achieve inflation rate of 2% which it failed to achieve:
“Initially, Abenomics did well as the rate of increase in consumer prices temporarily rose to 1.5% in 2013. But it turned out to be erroneous after increasing the consumption tax to 8% in April 2014. The premature increase in tax became the turning point of Abenomics. This impacted a mindset change in consumers and the way future had been shaped in their mind”.
He discloses that he and Abe were aware of this problem and were against tax increases, but they had to make decision supporting it due to political resistance which then prevailed.
On the pandemic situation and the difficulty in escaping from the increased magnitude of deflation:
“Monetary policy alone will not be enough but when supplemented with bold fiscal stimulus, it will turn out to be helpful. Public work projects must be carried out, only then money can be transferred from government to private sector and transactions will increase in volume. The government bonds will be issued by government of Japan which will further be bought by Bank of Japan for financing the private sector. In response to corona virus, never seen before bold fiscal mobilization was pursued. If there is bolder fiscal stimulus, maybe in another 23-24-year span there will be price increase of 2%.”
On Japan’s biggest concern ahead –worst financial situation:
“People income is not enough as to come out of deflation. Therefore, even on increasing consumption tax, the consumption tax revenue will increase but income tax & corporate tax revenue will only decrease. To improve the financial situation, taxes must be cut thereby economy will be revitalized, after which taxes could be raised.”
Let’s now look at the views of Mr. Takeshi Fujimaki, a member of parliament until last year, who posed serious questions on certainty of Abenomics to Abe and Bank of Japan’s governor Haruhiko Kuroda. Excerpts from an interview with him.
“It’s an alarming situation for a potential investor because of the underlying risk regarding structural problems of Japan’s economy. Japan will be borrowing (>90 trillion yen) and as well spending money (160 trillion yen) to counter effect corona virus which is hugely higher than its tax revenue in 2020(70 trillion yen).
Many economists say, house cannot go bankrupt, but it is okay for nations to have debts for some time.
Usually a nations debt is given back using taxpayers money but this time the debt of Japan is too high which demands a very heavy tax increase.”
On what could be the solution, if taxes cannot be raised?
“It will result in hyperinflation situation. Through various dimensions of easing, Bank of Japan is taking over by borrowing government debt. Fiscal mobilization and monetary easing are taken as countermeasure against corona effect in Europe and USA. It may seem to be a similar situation in Japan, but Japan has a huge debt amongst many other countries in the word.
In the future if value of yen falls & hyperinflation occurs there is no other choice. But Bank of Japan has to be abolished and a new central Bank of Japan will be established.
Corona virus situation is just a trigger for the kind of economic depression in Japan. The root cause is loosened financial discipline of government, and also because Bank of Japan has been continuously devaluing their currency (yen).”
Intending to pursue Abenomics, Suga has to make right policy choices, weighing the pros and cons of Abenomics.
4. JAPAN & the WORLD:
Nuggets from world affairs & Suga’s first telephone call after resuming office with world leaders: ( Notably he spoke with President of China & US, Prime Minister of Australia & Korea )
· The Japanese & Chinese leaders affirmed that both countries would work in close collaboration with policies to improve relations between each other; though nothing was spoken about the pending visit of Chinese president to Japan.
· South Korea has been claiming to IHO (International Hydrographic Organization) to represent maps by adding “East sea” written beside what is now called as “sea of Japan”. Considering the request, IHO has devised a proposal to change the names of oceans around the world to be denoted by numbers. Japan is likely to be in the standpoint to retain the current name as such which might spark controversy in the meeting to be held by IHO in November. The notation “Sea of Japan” was first used in one its publication by the IHO in 1990.
· In call with PM of South Korea on 24th September, Suga expressed importance of Japan –South Korea relationship not only because they are neighbors but also in forming a strong alliance with US in response to issues pertaining with North Korea. Moon affirmed his support to solve the Japanese abduction issue. Countermeasures to recover from the pandemic by opening business traffic between the two countries were also discussed.
· In telephone call with Trump, Suga affirmed the importance of their bilateral alliance& stressed the need of American support to resolve Japanese abduction issue with North Korea. Japan has had its ties strained with China regarding the uninhabited Senkaku islands, on which both countries make their claim. Japan government is looking at holding joint military drills with the United States around a group of East China Sea islands administered by Japan but claimed by China.
· Under Abe, India-Japan ties remained remarkable right from upgrading the relationship to a Special Strategic and Global Partnership, instituting the annual Prime Ministerial summits from 2006, forming the Quadrilateral with the U.S. and Australia, and working on India-Japan civil nuclear partnership, Japan’s first with a non-NPT country. He had close personal relationship with Indian PMs and his exit is a loss to India. India is hoping that under Suga the India-Japan ties remains the same and makes progresses. The first engagement is likely to be the Foreign Minister-level meeting of the Quad countries in October which will give an insight on the course of the relationship. This meeting is mainly to confront the growing assertiveness of China in the Indo-Pacific region. The initiative may strain Japan-China ties which have been evolving on one side.
· Meanwhile External Affairs Minister of India, S Jaishankar remarked on joint projects with Japan in Bangladesh and Myanmar which would take the relationship of the nations to the next level. He also spoke about military logistics pact which is considered as “big plus” for the evolution of Indo-Pacific vision and add to the security and stability of Asia.
· The recent report by Shardul Amarchand Mangaldas and FICCI presents pandemic as a unique opportunity to leverage the Indo-Japan relationship and provides policy insights into turning India a safe investment destination for Japanese business by reaping the demographic dividend of India.
5. ECONOMY & GREEN RECOVERY:
As Trade sector is hit hard due to pandemic, exports of Japan fell by 15% in August. In due course of time, normalcy will resume but may not reach pre-virus levels until early-2022.
The stock prices had plunged with stepping down of Abe and raised to level before the plunge with stepping in of Suga, in hopes about the reforms of new government .Even in 2012, when Abe stepped in with his promising & transformational Abenomics, it was said that stock prices had doubled or even tripled.
It is interesting to note a newly coined term “Japanification”, which implies low economic growth & weakness in prices of commodities with the prolonging effect of corona virus. Being aware of this, US Federal system Board of Directors (FRB) plans to reintroduce policy of “zero interest rate” until at least 2023.
On the other hand, manufacturing sector is thriving in the hub- Tokai region, despite corona situation unlike the Lehman shock period. We are aware that capital investments exhibit a trend predictive of the economy, which means there is some good news too.
In the recent UN meeting via video conferencing, Chinese president Xi spoke for the first time of a concrete plan in connection to the Paris agreement: “We will strive to achieve zero emissions by 2060.”
Whereas Japan is already on action and its proportion of renewable energy accounted to 23.1% of Japan’s total energy generation mixin the first half of 2020.This is a welcoming thing to note. But on the downside due to the pandemic effect, there has been decline in demand for the same. The government’s target was to reach 22 to 24 percent by fiscal 2030.
By the concept of Joint Crediting Mechanism, the Ministry of Economy, Trade & Industry regards Japan's contribution to greenhouse gas emission cuts by a foreign country as its own emission reductions. Efforts of Japanese firms by implementing greenhouse gas reduction projects in third world countries like Indonesia is commendable. Japan will continue to support similar emissions reduction efforts in other Asian countries.
Despite these efforts, Japan is facing international criticism as it’s not doing enough to fight global warming. A signatory to the Paris accord, Japan has continued to target a 26 percent reduction in greenhouse gas emissions by fiscal 2030 from fiscal 2013 levels. Though its efforts towards idea of green recovery are good, it is not up to the desired level.