Abe’s last shot for action on economic growth

This article originally was published in the Wall Street Journal Asia edition on November 19, 2015.

News that Japan’s economy is in recession for the second consecutive year has sparked another round of debate over whether Abenomics, Prime Minister Shinzo Abe’s eponymous economic program, has failed.

That may seem too harsh to some since a recession in Japan is not the sign of policy failure that it is elsewhere. According to the Bank of Japan, the country’s potential growth rate is just 0.5%. That means the Japanese economy is especially vulnerable to shocks and has little margin for error when it comes to avoiding negative growth. Despite the recession, unemployment is near historic lows at 3.4% and real wages have crept up in recent months after more than two years of decline.

However, any account of Abenomics as simply an economic program misses the point. From the beginning, Mr. Abe has framed this policy as not just a means to improve the lives of Japanese citizens but as essential for Japan’s national survival.

“A country that loses the mettle to grow has no future,” Mr. Abe said on New Year’s Day in 2013, just after taking power. Abenomics is fundamentally a political project by which Mr. Abe wants to strengthen Japan to survive in a more competitive regional order.

For Mr. Abe, his economic policies are ultimately about national strength. He returned to power warning of the “impending crisis” Japan faced as a result of “delayed reconstruction, prolonged deflation, and challenges to Japan’s sovereign territory and our nation’s sovereignty itself.”

To meet the challenge posed by China’s rise, Japan has to deepen its ties with the U.S. and with other countries in East Asia. It must strengthen its defense capabilities and defend its territorial claims. But it also has to grow. Without economic growth, Japan cannot compete with China over the long term.

By this standard, Abenomics hasn’t lived up to its promise. The latest recession is a reminder that while Japan remains wealthy in absolute terms, the looming crisis identified by Mr. Abe hasn’t abated.

Japan still faces a falling working-age population that hasn’t been offset by the entry (or re-entry) of women and the elderly into the workforce or by opening the country to immigration. Despite falling unemployment, economic gains have not accrued to workers due to a labor market still divided between protected regular workers and “flexible” part-time and temporary workers with few opportunities for advancement.

The weaker yen, a byproduct of the BOJ’s monetary easing, has helped exporters, but it may not be sufficient to entice manufacturers back to Japan. Although corporate Japan has enjoyed record profits, the Abe government has little to show for years of pressuring business leaders to spend their profits on wages and investment.

Instead, corporate retained earnings have reached an all-time high of $2.9 trillion. Despite the government’s bid to boost inward foreign direct investment, FDI continues to provide a tiny share of gross fixed capital formation and gross domestic product.

There are certainly bright spots. Record numbers of tourists, encouraging shifts in corporate governance and agricultural reform, Japan’s participation in the Trans-Pacific Partnership, the most tax receipts since the early 1990s. But three years into Abenomics, it still appears as if structural factors are limiting the growth and the emergence of a stronger Japan that Mr. Abe promised.

The prime minister is running out of excuses. He enjoys stable public support for his economic policies, and he has also tamed his Liberal Democratic Party (LDP), which has historically made life difficult for its leaders. Meanwhile, the mainstream opposition parties are too busy fighting among themselves to focus on Mr. Abe and the shortcomings of Abenomics.

The economy should be at the top of Mr. Abe’s agenda right now. The laws passed by the Diet in September to expand the role of Japan’s Self-­Defense Forces may be the last significant national-security legislative changes he can pursue, in light of public opposition to constitutional revision.

Once elections for the Diet’s upper house are held next summer, the prime minister will have a two-year window before the end of his term as LDP president and the next national elections. Mr. Abe now enjoys as free a hand as any Japanese prime minister can expect.

If he wants to realize his vision of a stronger Japan, it’s time he follows his own advice and undertake long-promised structural reforms. In his second press conference after returning to power, he said, “I intend to place greater emphasis on a single meaningful outcome than on one hundred empty words.”

After his first three arrows, the “new three arrows” announced in September, three growth strategies and countless advisory council plans, the Abe government has produced plenty of words about how to boost Japan’s growth. Still missing is determined action from the prime minister.

This article originally was published in the Wall Street Journal Asia edition on November 19, 2015.