Japan’s Next Leader Faces Epic Challenges

Japan will hold a general election on Sunday, 16 December, 2012, in which the ruling Democratic Party of Japan (DPJ) is expected to see a catastrophic defeat, potentially losing around two-thirds of its 230 seats in the 480-member Diet. This would mark a sharp reversal of fortunes from its historic victory in the 2009 election, in which it almost won a two-thirds majority. Meanwhile, the main opposition Liberal Democratic Party (LDP), which ruled Japan almost continuously for 54 years prior to its 2009 defeat, appears poised to win an outright majority, according to the Japanese media. LDP leader Shinzo Abe would thus become prime minister, regaining a post he held in 2006-2007. In Business Monitor Online this week, we published an election primer outlining the main parties’ policies and probable impact.

The Next PM’s Poisoned Chalice

Abe’s own political revival is remarkable, given that his one-year premiership was characterised by ministerial gaffes and scandals, as well as his focus on patriotism and national security matters at a time when voters were more concerned about ‘bread and butter’ issues. However, assuming he becomes prime minister again, Abe will immediately inherit a poisoned chalice. Below are just some of Japan’s short- and long-term challenges:

Economy: Japan is once again in technical recession, and the latest Tankan business survey puts confidence at an almost three-year low. Abe will need to move quickly to revive the economy. If he fails to deliver results by the time of Japan’s Upper House elections, which are due in July 2013, then the LDP risks losing seats (it currently holds only 84 out of the chamber’s 242 seats). Indeed, one of the reasons why Abe resigned in 2007 was the LDP’s poor performance in that year’s Upper House election. More broadly, Abe will be Japan’s 15th prime minister in 20 years (counting himself twice), and the sixth in five years. Most Japanese premiers come under pressure to resign when their approval ratings drop below 25%. Given the sheer magnitude of Japan’s economic problems, this typically happens within a year of prime ministers taking office. The frequent turnover of leaders is disruptive to policy and results in power being exercised by the change-resistant bureaucracy rather than politicians. This partly explains why Japan has seen only limited reforms since the onset of the ‘lost decade’ in the early 1990s.

Relations with neighbours: Japan’s perceived non-repentance for its atrocities in China and Korea in the early 20th century, and its maritime territorial disputes with both countries have severely damaged relations with Beijing and Seoul. Anti-Japanese sentiment in China is especially damaging for the Japanese economy, because it has led to boycotts of Japanese goods (China is Japan’s biggest export destination) and hurt two-way tourism. Abe will find it extremely difficult to strike a balance between defending Japanese territorial interests and avoiding antagonising China to the extent that this further weakens Japan’s economy. Given Abe’s nationalist stance on the legacy of World War II and his desire to boost Japan’s military budget and operational remit, he is bound to anger China – although having said that, he did manage to improve Sino-Japanese relations during his brief premiership.

National debt burden: Japan’s debt has swelled to gargantuan proportions, exceeding 230% of GDP, which is the highest burden among mainstream economies. To his credit, Prime Minister Yoshihiko Noda at least managed to pass legislation to double the consumption tax to 10% over the next few years, making a highly unpopular but probably necessary decision to rein in the deficit that will cost him his job. Abe is theoretically receptive to the sales tax hike, but has also pledged more fiscal stimulus via public works projects – the LDP’s traditional fall-back position that is one of the reasons why the debt burden rose so steeply during the ‘lost decade’ of the 1990s. If Abe fails to make progress with deficit and debt reduction, Japan could face a colossal fiscal crisis this decade.

Demographics: Japan’s population is shrinking and ageing rapidly, with negative consequences for the workforce and pension burden. One way of mitigating these problems would be to promote immigration and higher female participation n the workforce. However, it is unclear if Abe or the LDP are willing to champion such reforms, which would also require a cultural shift among the Japanese public.

The ‘edge’: Japan has lost its edge against South Korea in many ways. For example, twenty years ago, or even 10 years ago, Japanese firms still dominated the consumer electronics industry. However, South Korean companies have become more prominent than their Japanese rivals in products such as flat-screen TVs and smartphones. Meanwhile, Japanese cars have experienced mass recalls due to safety concerns. South Korea’s Samsung and Hyundai displacement of Japan’s Panasonic and Sanyo from the neon advertisements in London’s Piccadilly Circus is a metaphor for this shift. True, Japanese companies still produce a high proportion of ‘inside-the-box’ specialist components and materials in goods produced by other countries’ companies, but how long can this last?

Japan Still Strong, But At Risk Of ‘Comfortable’ Decline

Despite its woes, Japan is still a remarkably peaceful and stable place. Even after almost two non-consecutive lost decades, voters have eschewed political extremism, while unemployment is significantly lower than in the US and Western Europe, and the crime rate is also relatively low. In fact, some Western commentators have suggested that far from being a warning to the Western world, Japan is a role model for how to manage relative economic decline amid ageing demographics and rising debt.

The trouble with this argument is that it is somewhat defeatist. Unfortunately for Japan, there are probably many in the leadership and in society who would prefer the status quo rather than risk undertaking rapid and radical reforms that might not work anyway, but would make Japan more chaotic in the process. This attitude is far from unique to Japan, and in fact applies to China too, and many other countries. However, this mindset could become more entrenched in Japan as the society ages (we assume that an aged society is generally less keen on dramatic change).

Real Change May Be Many Years Away

Assuming the LDP wins big on Sunday, a key question is whether it will be back in power for decades, or whether Japan will now see big swings at each election between the DPJ and LDP, or whether this will be the LDP’s last chance to prove itself before a new ‘third force’ emerges. As regards the ‘third force’, this is likely to be the Japan Restoration Party (JRP), which was formed in late 2012 through a merger of Osaka mayor Toru Hashimoto‘s Osaka Restoration Authority and a new party set up by former Tokyo governor Shintaro Ishihara. The JRP has some radical proposals for reforming the way Japan is governed, which could conceivably lead to economic change. However, the JRP has failed to make significant headway against the LDP and might in fact align itself with it. A poor showing by the JRP would raise doubts about its future. A strong showing, especially if its seat total approaches that of the DPJ, would position it well for success in the 2017 election.

Overall, it is unclear how much will change after the December 2012 election. However, if Japan continues on its present course of weak leadership and lack of reform, then it will risk sliding farther down the rankings of major nations. The lost decades might become a lost eternity.

This Week’s Trivia Question

Last week, we asked, “Despite US sanctions on Iran, what unusual item does the US Department of Defense buy from Iran through middlemen, for the purpose of assisting its war efforts in Afghanistan?” The answer is an antidote for snake bites. Iran has similar snakes to Afghanistan, giving it an expertise in snake-bite treatment, at least in this part of the world. This week, the theme is films set at Christmas time. Which 1980s action film featured a corporate Christmas party being taken over by terrorists? Hint: it was a Japanese company with an office in Los Angeles.