Japan’s (relatively) new government is arguably doing (much) better than its critics inside and outside of Japan anticipated when the Liberal-Democratic Party (LDP) Prime Minister Shinzo Abe took over power last December. The government’s economic and monetary policies centered around massive quantitative easing and economic stimulus packages aimed at achieving 2 per cent inflation and the (sustainable) resumption of economic growth (after 15 years of deflation and two decades of sluggish economic growth) have achieved some notable results over the last 4 months.
Japan’s Nikkei Index has surged by more than 40 per cent, a cheaper yen (which have lost 20 per cent against the US dollar over the last four months) is favoring Japanese exports and Japanese economic growth in 2013 will most probably be more robust and sustainable than previously estimated. As regards foreign and security policies, Tokyo still finds itself dealing with a bilateral territorial dispute with China in the East China Sea (for all the details on the territorial dispute see the e.g. commentary by Paul O’Shea in this dossier). The Japanese Prime Minister's nationalist and China hardline credentials together with Tokyo and Beijing insisting that sovereignty over the disputed islands in question (the Japanese-controlled Senkaku Islands in the East China Sea) is non-negotiable will most probably make sure that the territorial dispute will occupy both Japan and in 2013 (and beyond). In view of the de facto absence of the possibility of achieving a resolution of the bilateral territorial dispute, Shinzo Abe is charged with the task of managing the conflict with China aimed at not letting a territorial dispute have a negative impact of mutually lucrative and beneficial trade and business ties.
What could happen in Japanese economics, finance and foreign policies in the 6-12 months ahead? Numerous scenarios are possible, below two of them: the “Everything-will-turn-out-fine” scenario and the “Everything-will-not so-much-turn-out-fine” scenario.
1. “Everything-will-turn-out-fine” scenario: Tokyo’s monetary policies and the massive quantitative easing (dubbed ‘Abeconomics’ in the press) result in sustainable economic growth, going beyond temporary economic growth. The Bank of Japan (BoJ)’s quantitative easing will make its contributions to achieve inflation after 15 years of deflation, which in turn will create employment and lead to more robust domestic consumption. Japan’s corporations-helped by a weaker yen (achieved through loose monetary policies)-decide after 15 years of pay freeze to finally raise salaries supporting a return to sustainable and ‘healthy’ inflation. The Abe government will maintain its promise to adopt badly-needed economic and structural reforms to give Japanese economic growth a more fundamental basis making sure that the country's economy can grow without additional economic stimulus packages (which would further drive up Japan’s public debt already amounting to 240 per cent of GDP). The LDP will secure another landslide victory at the Upper House elections in July as a confirmation of its-by Japanese standards-revolutionary fiscal and monetary policies. As regards relations with China, Tokyo and Beijing are able to de-escalate the conflict returning to the original idea of what is referred to as ‘functional cooperation’, i.e. the attempt to jointly exploit resources around the disputed islands, thereby eliminating the risk of a bilateral military in the disputed waters in the East China Sea.
2. “Everything-will-not so-much-turn-out-fine” scenario: In essence, the opposite of the “Everything-will-turn-out-fine” scenario. Tokyo’s loose monetary policies and quantitative easing produce only temporary and non-sustainable growth and Tokyo sees itself obliged to adopt further economic stimulus packages. This will further drive up public debt (far) beyond the currently 240 per cent of GDP. Further economic stimulus packages do not to produce sustainable economic growth and inflation as Japanese corporations do not-like over the last 20 years-increase salaries aimed at increasing domestic consumption. The Abe government is not able to make good on its promise to adopt economic and structural reforms and economic growth will return to being (very) sluggish. This in return will favor a return to deflation, which will further keep companies from raising salaries. Relations with China do not stabilize and will continue to be burdened by the territorial dispute in the East China Sea. Chinese intrusions into Japanese-controlled territorial waters around the disputed islands continue and the risk of a small-scale between the Chinese navy and the Japanese coast guard will persist. Bilateral economic and trade relations will begin to suffer sustainably.