Japan's Thatcher: Meet the man determined to end the "lost decades"

Shinzo Abe’s first, brief premiership ended in disaster. Yet now, recovered from debilitating illness, the conservative nationalist is back in power and, emboldened by “Abenomics”, is determined to revitalise Japan after many years of decline.

Had it not been for Asacol, a drug to treat ulcerative colitis, the name Shinzo Abe would probably be barely recognisable outside Japan today. True, Abe briefly served as prime minister once before, when he spent 12 embarrassing months in office in 2006 and 2007 plotting a constitutional revision that few wanted and fending off accusations that his government had lost the nation’s pension records. That stint ended in disarray. Under him, the Liberal Democratic Party was trounced in the upper-house elections of July 2007, a defeat that eventually led, in 2009, to its ejection from power after an almost uninterrupted half-century running Japan.

He quit in September 2007, not long after that electoral drubbing. At the press conference, sweating and grey-faced, he looked like a broken man. As if his political miscalculations hadn’t been bad enough, aides whispered darkly about the bowel disease that had drained him of energy. Few expected to hear from him again.

Yet in December last year, Abe (pronounced “Ah-bay”) was re-elected to the premiership. This time, he comes armed with “Abenomics”, a three-pronged policy aimed at reviving the economy after 20 years of drift. He has a socially conservative agenda, a hawkish streak and a mandate that should allow him to remain in office until at least 2016. That is a long time by the standards of recent Japan, where prime ministers come and go with the fleetingness – though rarely the beauty – of cherry blossom. In the past 30 years, only Yasuhiro Nakasone (prime minister from 1982-87) and Junichiro Koizumi (2001-2006) have lasted as long or left anything approaching an impression.

“This is an important moment for Japan,” says Hiroaki Fujii, a former ambassador to the UK who is now chairman of the Mori Arts Centre in Tokyo. “There is no national election for three years, no strong opposition parties and no strong personalities who can compete with Abe inside the Liberal Democratic Party.”

The approval a few years ago by Japanese regulators of Asacol, an innovative medicine that has helped control Abe’s bowel condition, was a prerequisite for his comeback. It was, at any rate, important enough for him to mention it in a speech at the Guildhall in London in June as an example of the ponderous and protective regulations that he said were holding Japan back. “If this drug . . . had taken more time to appear on the market in Japan, it’s quite possible that I would not be where I am today,” he told a possibly bemused audience, some of whom may not have been au fait with his medical history.

On its own, the restoration of Abe’s health was not enough to bring him back. The reasons for his unlikely second coming are twofold. First, there is the increasingly dangerous territorial dispute between Japan, the world’s third-largest economy, and China, its second-largest, over uninhabited islands – rocks, really – in the East China Sea. That fight, which many ordinary Japanese consider an early sign of China’s growing, muscular ambition, has made Abe’s brand of nationalism more palatable to an electorate that still maintains pacifist leanings.

The second, perhaps even more important, reason for Abe’s return is his economic plan. He has begun to enact a bold (some say wilfully irresponsible) programme to reflate an economy that has been eroded by steady deflation for 15 years and one dealt further blows by the global financial crisis and the earthquake and tsunami of 2011.

The plan, which centres on forcing the central bank to hit a 2 per cent inflation target, holds out at least a possibility of reviving an economy caught in a deflationary trap since the mid-1990s. If it works – and that is a very big if – Japan could plausibly emerge from the sense of inexorable decline and pending crisis that has hung over it through two “lost decades”.

Who is Shinzo Abe? Any quest for his “inner soul” should begin – like his autobiography, Towards a Beautiful Country – on his grandfather’s knee. Abe’s maternal grandfather was Nobusuke Kishi, a leading official in Japanese-occupied Manchuria. Kishi was a member of the wartime cabinet, and after defeat in 1945 he was at risk of being convicted as a class-A war criminal. In 1948 he was released without charge. He was de-purged in 1952 as part of the US “reverse course”, when Washington decided that Japanese right-wingers were less dangerous than the communists in China and the Korean Peninsula. Kishi went on to become prime minister, the head of a postwar establishment that has always been more conservative than the broader Japanese public.

Abe’s great-uncle Eisaku Sato was also prime minister and his father, Shintaro Abe, a long-serving foreign minister, might well have become prime minister, too, had he not died of heart failure in 1991.

Since his early years, Abe’s privileged position and political heritage have marked him out for the premiership. Of all his influences, the deepest is Kishi. “His grandfather may be the central factor in this psychodrama,” says Yoichi Funabashi, a former editor-inchief of the left-leaning Asahi newspaper, referring to what he considers Abe’s obsession with Japanese honour and interpretations of the country’s history. “He had immense respect for his grandfather and from childhood he felt that his grandfather was unfairly demonised in the liberal press.”

Abe is the most conservative Japanese prime minister of his generation. He is close to the revisionist right, which still seethes at the country’s postwar “humiliation” and what it regards as the victors’ justice that has branded Japan and Japanese imperialism as evil. “There is a grudge and resentment about the San Francisco Peace Treaty,” says Funabashi, referring to the 1951 agreement that brought to a formal close issues relating to Japanese reparations and territorial settlement. “This is part of his ambivalence towards the US and it remains at the core of a hidden tension.”

Abe wants to change a pacifist constitution that, strictly interpreted, forbids Japan from maintaining a standing army or navy and strips it of its “sovereign right” to wage war. He is also nostalgic for the Japan of the pre-war era, when the emperor was the divine head of state – not the reduced symbol he is today – and when schools taught children to take pride in their nation. From Abe’s perspective, the teaching of Japanese history by the left-leaning teachers’ unions, far from downplaying Japan’s wartime responsibility, indulges the country’s sense of shame as a defeated and “renegade” nation.

That is certainly not how it is viewed by China and South Korea, which point to the publication of Japanese school textbooks that minimise – or ignore entirely – events such as the Nanjing Massacre or the Japanese imperial army’s industrial use of “sex slaves” during the war. In Beijing and Seoul, many regard Abe as a figure who represents a dangerous lurch back to the military expansionism of the past. “This is not only about Article 9,” says Kiichi Fujiwara, a professor of international politics at Tokyo University, referring to the pacifist clause in the constitution.

“This is about the humiliation of defeat and the acceptance of having your constitution written by the Americans. People like Abe have a victim mentality. They think: ‘These guys keep on telling lies about Japan and we look bad because of those lies.”

There is another force shaping Abe’s strong regard for the “national interest” – a term he uses frequently but one that is fairly unusual in postwar, pacifist Japan. His political heartland is Yamaguchi Prefecture, to the west of the country, which was called Choshu during the Edo period (1603 to 1868), when Japan was isolated from the rest of the world. Choshu was one of four regions that rebelled against the shogunate, a feudal government, setting Japan on one of the most remarkable modernisation processes in history. A rallying cry of the Meiji Restoration (1868 to 1912) was fukoku kyohei, a phrase borrowed from an ancient Chinese idea meaning “rich nation, strong army”. The premise was that only if Japan built a flourishing economy would it have the wherewithal to defend itself from foreign powers.

Abe’s recent conversion to the idea that bold measures are needed to reverse Japan’s genteel decline should be seen in this light. No longer the biggest economy in Asia, it has watched uncomfortably as its influence has waned. As China’s military budget has enjoyed double-digit percentage increases, Japan’s has been stuck at 1 per cent of a dwindling nominal gross domestic product.

That sense of drift became more acute after the global financial crisis of 2007-2008, which wrecked Japan’s export markets. Then in 2011 the tsunami washed over the Fukushima Daiichi nuclear power plant, forcing the shutdown of almost all nuclear capacity. That added to growing concern that Japanese manufacturers might ditch the country altogether for faster-growing foreign markets. Its mighty trade surplus, long the single engine of the sputtering economy, turned negative because of the need to ramp up imports of oil and gas.

In several speeches since his return to power last year, Abe has explicitly linked the issue of economic revival with Japan’s national interest. In a bravura speech entitled “Japan Is Back”, given in Washington this February, he said: “Japan must stay strong, strong first in its economy and strong also in its national defence.” In his Guildhall speech, he merged the two ideas: “I consider it both my role and my fate to restore and enrich the power of the nation of Japan.”

Abe’s economic plan comes in three parts, the so-called three arrows that also reflect his Choshu roots. Motonari Mori, a 16th-century daimyo (feudal lord), is said to have told his three sons that they had to work together: one arrow could be easily snapped but three, bound together, could not. Abe’s “three arrows” are fiscal flexibility, massive monetary stimulus and structural reform aimed at raising the economy’s potential growth rate. He took office with a big spending package but the boldest element of his policy was the pledge to do whatever was necessary to rid Japan of the deflation that had been damaging the economy for a decade and a half.

Abe appointed a governor of the central bank who said, in effect, that he would print money until inflation hit 2 per cent. The mere announcement – in stark contrast to the utterances of previous central bank governors, who had given the impression that they were powerless to act – has sent share prices up by nearly two-thirds and weakened the currency by a fifth. By this August, inflation had stirred and was running at 0.8 per cent, though that was mainly the consequence of higher energy import costs, owing to the weaker yen.

Still, other parts of the economy have flickered into life. People have started spending more, exports are up and Japan is growing at roughly 4 per cent – making it, improbably, the fastest-growing Group of Seven economy. Business confidence is at a six-year high. The sick man of Asia has, for the moment at least, turned fleet of foot. When I saw Abe in Tokyo in October, he looked dapper and full of confidence. “The economic results speak for themselves,” he boasted.

The big question is: can it last? Critics say Abenomics is a mirage, a money printing exercise that is bound to end in currency debasement, capital flight and possible default. Noriko Hama of Doshisha University in Kyoto calls it “asset-bubble economics”. One fear is that, if the policy works, bond yields could rise, making it harder – if not impossible – for the government to service its gargantuan debt. Even those who don’t foresee disaster worry that rising prices (assuming they can be sustained) won’t be accompanied by rising wages. One of the benefits of deflation is that it has kept living standards afloat. Wages may have been pinned to 1990 levels but the prices for some goods are back where they were in the 1980s.

“Abe is able to claim success in relation to the initial steps of Abenomics. There has been some success so far,” says a former senior official. “The substance, however, will have to come from the real economy, from the creation of new industries, the expansion of export industries and the consumer sector, which will come from rising wages.”

Abe has emphasised his “third arrow”: the structural reforms that will supposedly raise the economy’s growth potential. In speeches, he has talked loftily about supply-side reforms. In London he invoked the name of Margaret Thatcher, viewed by Japanese economic liberals as an example of someone who unleashed the potential of a previously moribund economy. Abe has presented a blizzard of ideas: deregulation zones; higher participation of women in the workforce; labour flexibility; a more open immigration policy. “What is necessary for Japan’s revival is a powerful catalyst that will restyle the old Japan and make the ‘new’ Japan even stronger,” he told his Guildhall audience.

To the many doubters, Abe is merely regurgitating ideas that have been doing the rounds for a decade or more. Some, in any case, doubt the efficacy of supply-side reforms or worry that his policies could lead to a harsher, Anglo-Saxon-style capitalism in a country that has held on to the myth – if not quite the reality – of egalitarianism.

Those who think, conversely, that a Thatcherite shake-up is exactly what Japan needs doubt whether he will pull through. Nor do many expect him to transform immigration policy or to alter societal views about women in the workforce. He has raised consumption tax, from 5 to 8 per cent, as a first step in repairing the giant fiscal hole, though some worry that the economy is still too fragile to take such a shock.

Abe has put much faith in Japan’s entry into the Trans-Pacific Partnership, a wouldbe “high-level” trade agreement linking 12 countries of the Pacific, including the United States. The idea is to bring external pressure – the Japanese call it gaiatsu – to bear on protected industries, particularly farming and the medical profession. By opening itself up more, Abe argues, the country will learn how to compete better.

The central plank of Abenomics remains reflation. In October, the prime minister laid out to me the best-case scenario. “Company profits are going up. Naturally, with a tax cut, they’ll go up even more. If that influences wages, then consumption should rise, expanding economic growth further. With that, corporate profits can rise and we’ll have entered a virtuous circle.”

That is the best of all outcomes in the best of all possible worlds. Pessimists still predict that Abenomics will hit a wall. If, however, Abe can bring even modest, sustainable improvement to an economy that has gone sideways for years, he will go down as one of the most effective Japanese prime ministers in decades.

That is assuming that his nationalist impulses don’t lead to some kind of diplomatic bust-up with the country’s neighbours, particularly China. In the interests of pragmatism, he has refrained from visiting the Yasukuni Shrine, which to Beijing and Seoul is a loathsome symbol of militarism that contains the “souls” not only of two million ordinary soldiers but also those of 14 class-A war criminals. Yet he has made it clear that he would like to visit and that, as Japanese prime minister, he has every right to pay respects to Japan’s war dead; however, so far he has not done so, though several of his cabinet ministers have made the pilgrimage.

Abe has also backed away from an idea to amend two apologies for Japan’s wartime behaviour. Lacking a two-thirds majority in the upper house, he has suspended any immediate plans to push for amending the constitution. In any case, a revision would need to be ratified in a public referendum, something that would be very hard to achieve, particularly if it involved meddling with the pacifist terms of Article 9.

Those who worry that Abe represents a sinister nationalism perhaps underestimate the influence of the Japanese public. Though often criticised for being passive, most Japanese hold on firmly to pacifist convictions, born of terrible memories of the wartime defeat. Ryu Murakami, a well-known novelist, told me emphatically, “Abe may want to change the constitution but the Japanese people are not that stupid.”

Still, the prime minister has marginally increased Japan’s defence spending and approved a law to form a national security council. When pushed, he has quibbled with definitions of Japan as a wartime “invader”. To many Chinese and South Koreans, that makes him an unreconstructed revisionist whose rhetoric carries worrying echoes of the nation’s military past.

For the moment, however, all of Abe’s energies are being channelled into getting Japan’s economy moving again. These days, the country’s nationalism is not concentrated, as it once was, on the cult of the emperor. By prioritising the revival of its economy, Shinzo Abe has reconnected Japan with the cult of GDP instead.

David Pilling is the Asia editor of the Financial Times. He was the FT’s Tokyo bureau chief from 2002-2008. His book “Bending Adversity: Japan and the Art of Survival” will be published by Allen Lane (£20) in January next year

Follow those arrows: Shinzo Abe wants to boost Japan by keeping the economy revving and increasing its international standing.

This article first appeared in the 17 October 2013 issue of the New Statesman, The Austerity Pope

Ralph Orlowski / Getty
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Labour's investment bank plan could help fix our damaging financial system

The UK should learn from the success of a similar project in Germany.

Labour’s election manifesto has proved controversial, with the Tories and the right-wing media claiming it would take us back to the 1970s. But it contains at least one excellent idea which is certainly not out-dated and which would in fact help to address a key problem in our post-financial-crisis world.

Even setting aside the damage wrought by the 2008 crash, it’s clear the UK’s financial sector is not serving the real economy. The New Economics Foundation recently revealed that fewer than 10% of the total stock of UK bank loans are to non-financial and non-real estate businesses. The majority of their lending goes to other financial sector firms, insurance and pension funds, consumer finance, and commercial real estate.

Labour’s proposed UK Investment Bank would be a welcome antidote to a financial system that is too often damaging or simply useless. There are many successful examples of public development banks in the world’s fastest-growing economies, such as China and Korea. However, the UK can look closer to home for a suitable model: the KfW in Germany (not exactly a country known for ‘disastrous socialist policies’). With assets of over 500bn, the KfW is the world’s largest state-owned development bank when its size is measured as a percentage of GDP, and it is an institution from which the UK can draw much-needed lessons if it wishes to create a financial system more beneficial to the real economy.

Where does the money come from? Although KfW’s initial paid-up capital stems purely from public sources, it currently funds itself mainly through borrowing cheaply on the international capital markets with a federal government guarantee,  AA+ rating, and safe haven status for its public securities. With its own high ratings, the UK could easily follow this model, allowing its bank to borrow very cheaply. These activities would not add to the long-run public debt either: by definition an investment bank would invest in projects that would stimulate growth.

Aside from the obviously countercyclical role KfW played during the financial crisis, ramping up total business volume by over 40 per cent between 2007 and 2011 while UK banks became risk averse and caused a credit crunch, it also plays an important part in financing key sectors of the real economy that would otherwise have trouble accessing funds. This includes investment in research and innovation, and special programs for SMEs. Thanks to KfW, as well as an extensive network of regional and savings banks, fewer German SMEs report access to finance as a major problem than in comparator Euro area countries.

The Conservatives have talked a great deal about the need to rebalance the UK economy towards manufacturing. However, a real industrial policy needs more than just empty rhetoric: it needs finance. The KfW has historically played an important role in promoting German manufacturing, both at home and abroad, and to this day continues to provide finance to encourage the export of high-value-added German products

KfW works by on-lending most of its funds through the private banking system. This means that far from being the equivalent of a nationalisation, a public development bank can coexist without competing with the rest of the financial system. Like the UK, Germany has its share of large investment banks, some of which have caused massive instabilities. It is important to note that the establishment of a public bank would not have a negative effect on existing private banks, because in the short term, the UK will remain heavily dependent on financial services.

The main problem with Labour’s proposal is therefore not that too much of the financial sector will be publicly owned, but too little. Its proposed lending volume of £250bn over 10 years is small compared to the KfW’s total financing commitments of  750 billion over the past 10 years. Although the proposal is better than nothing, in order to be effective a public development bank will need to have sufficient scale.

Finally, although Brexit might make it marginally easier to establish the UK Investment Bank, because the country would no longer be constrained by EU State Aid Rules or the Maastricht criteria, it is worth remembering that KfW’s sizeable range of activities is perfectly legal under current EU rules.

So Europe cannot be blamed for holding back UK financial sector reform to date - the problem is simply a lack of political will in the current government. And with even key architects of 1980s financial liberalisation, such as the IMF and the economist Jeffrey Sachs, rethinking the role of the financial sector, isn’t it time Britain did the same?

Dr Natalya Naqvi is a research fellow at University College and the Blavatnik School of Government, University of Oxford, where she focuses on the role of the state and the financial sector in economic development

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