Macroeconomic News

A new era in Japan: Suganomics?

As Japan’s longtime PM, Shinzo Abe, steps down after almost a decade of service, his successor inherits the third-largest economy which has emerged relatively unscathed from the aftermath of a cancelled Olympic games and the largest fall in GDP since records began in 1980. Yoshihide Suga was confirmed as the 99th Japanese prime minister last week after being voted into office by the Diet — Japan’s national legislature. With this new premiership comes promises of ambitious policy reforms whilst maintaining continuity within the administration and its enduring policies of monetary easing, and fiscal stimulus, endearingly dubbed “Abenomics” under his predecessor. 

Did “Abenomics” work?

In 2013, then PM Abe announced a set of robust measures to tackle Japan’s endemic bout of deflationary stagnation, aiming to revive the flagging economy whilst maintaining fiscal discipline. It revolved around three key “arrows” — aggressive monetary policy, flexible fiscal policy, and growth strategies including structural reform. A decade on, the programme has seen varying success with millions of jobs created and the deflationary spiral halted with the average annual growth rate between 2013, and 2019 sitting at 1.1%. However, some data from the Bank of Japan (BOJ) demonstrates that the economic growth under Mr Abe’s programme took place not as a result of productivity gains but rather growing capital and labour inputs due to shifting demographics. 

The coronavirus pandemic has only exacerbated Japan’s skyrocketing levels of public debt, sitting at nearly 150% of GDP. Measures by the previous administration to counter this proved ill-timed, with Typhoon Hagibis straining the economy whilst it was simultaneously reeling from the much-delayed consumption tax hike to 10% (Japan’s equivalent to VAT and GST). Mr Suga must now contend with an urgent need for revenue-increasing measures whilst avoiding any sudden fiscal tightening.

Having presented himself as a “continuity” candidate to the ruling Liberal Democratic Party (LDP), the new PM plans to stay true to the course with the massive monetary easing programme by the BOJ set to continue, having already purchased trillions of yens worth of government bonds to counter deflation earlier in the year. However, in light of declining productivity gains and an aging population that will inevitably be followed by rising social security costs, Mr Suga has a formidable task laid out before him. Namely, implementing much-needed sweeping structural reforms that enhance the productivity of the labour market, either through regulatory reform or stimulus packages, and encourage economic growth all while contending with vested interests within party factions and the old-fashioned bureaucracy permeating certain industries.

A force for change

Amidst a backdrop of stubbornly low inflation and a global pandemic, Mr Suga has wasted no time in leveraging the momentum of his new administration by pushing for strong reforms, particularly across areas concerning digital transformation, public health insurance coverage, and the telecommunications industry. Within 24-hours of being appointed, Mr Suga had appointed a cabinet minister to the newly created post of Minister for Digital Transformation, tasking him with the development of Japan’s first-ever Digital Agency in a push for efficiency improvements within government services through the adoption of technology. Along with the catalytic effects of the pandemic, this could herald the long-overdue digitisation of various components of the government, which by some measures falls far short of it’s global counterparts. It is precisely this brand of speedy decision making which has helped Yoshihide Suga build up his fearsome reputation as a workaholic within the administration.

It is no coincidence that Nippon Telegraph & Telephone Corporation, the former state telecoms monopoly, announced this week that it would be taking its mobile telecoms unit,  NTT Docomo, private, in what is potentially the country’s largest ever tender offer at $40bn. When it was first listed at the turn of the century, it was hoped that this would help bring prices down by making the sector more competitive. This pipe dream never materialised and now, with Mr Suga’s administration owning a third of NTT, the Japanese government appears well-positioned to push down mobile fees — a key tenet of Mr Suga’s policies even when he was cabinet secretary. Shares of Docomo were up 18.5% on Tuesday whilst those of its main rivals, SoftBank Corporation and KDDI, fell due to concerns of impending price cuts, in which they would have little choice but to follow suit. This comes in the face of already razor-thin margins after numerous price wars and billions poured into developing 5G infrastructure within the sector.

This salvo of rapid-fire reforms clearly illustrates the deft touch of Mr Suga who is quick to pick up and act on public sentiment with decisive, and targeted policies. The push for greater integration with technology across numerous sectors goes hand-in-hand with cheaper phone bills, further fuelling its adoption in a virtuous feedback loop. 

During his tenure as chief cabinet secretary, Mr Suga was persistently at the forefront of policy reforms and worked tirelessly behind the scenes to bring about change on a number of areas, from regulations concerning the use of dams allowing for better natural disaster preparations to the easing of visa issuance restrictions leading to a massive influx of foreign tourists. His frequently repeated desire to “work for the public” and focus on concrete action instead of electoral politicking leaves observers with little doubt that Mr Suga and his administration will prove to be a force for change. 

The long road ahead

Choosing to forego an election anytime soon, Mr Suga maintains a tight grip over party factions whilst facing little challenge from a feeble opposition that has long struggled to form a cohesive party.  Should Mr Suga be able to move beyond the issues of constitutional reform that his predecessor so desperately sought out, the volatile mix of a global pandemic, broad support from his party, and strongly positive public opinion, there is little that stands in the way of reform. 

With a US presidential election coming up and ever worsening Sino-U.S. relations, Mr Suga’s more subdued and restrained approach to foreign policy might be just the stabilising factor the region needs. He has expressed desire to maintain stable relations with China while pursuing the longtime US-Japan alliance, and at the same time push for a “free and open Indo-Pacific”. Mr Suga also aims to maintain efforts in resolving disputes with North Korea over abductions of Japanese nationals, a sensitive issue he is more than familiar with after working closely on it as chief cabinet secretary.

Despite the heightened geopolitical tensions, for now his focus seems to be on domestic policy aimed at cementing his position as leader of the LDP and steering Japan through the coronavirus crisis with decisive, and cogent action. Perhaps it is fitting that just last year, Mr Suga was tasked with unveiling the name of the new imperial era beginning in 2019 — Reiwa, meaning “beautiful harmony”. With his keen ear for public sentiment and political prowess, there will be no shortage of change over the coming years with Mr Suga at the helm.


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