Japan: February 2017 update

Prime Minister Shinzo Abe is dominant at home but faces continued challenges in boosting economic growth, which has more or less flat-lined for two decades now.

Some analysts have suggested that Abe’s approval ratings could go down over the course of 2017 if he mishandles the proposed referendum to change Japan’s Constitution or if the economy loses the fragile momentum it currently has. A fraying of the US-Japan alliance could also affect his popularity. But the likelihood must be that he will end the year in as strong a position as he began it.

Efforts to amend the Constitution

Abe favours amending Article 9 of the Constitution, under which Japan renounces the right to wage war to settle international disputes. He and his supporters want Japan to be able to exercise a right to ‘collective self-defence’, thereby playing a greater supporting role in military operations around the world being conducted by its allies.

To do this he requires legislation approving the new wording to be passed in both the lower and upper houses by a two-thirds majority, and a majority vote in favour of the new wording in a national referendum. Following the 2016 upper house elections, there is now potentially a two-thirds majority in both chambers for such an amendment, but a referendum vote in favour is far from guaranteed. So Abe is yet to take the plunge.

Relations with China

The most important foreign relationships for Japan continue to be with China and the US. In the case of China, the main source of tension between them remains their territorial dispute in the East China Sea. As far as Japan is concerned, China has been carrying out serial acts of provocation, sending a steady stream of naval vessels and airplanes into or close to Japanese territorial waters. Talks to establish a ‘hotline’ between the two countries to help prevent conflict have so far been unsuccessful. The two are also at loggerheads over issues like the South China Sea and visits by Japanese politicians to the Yasukuni Shrine in Tokyo, which honours (amongst others) 14 Class A Japanese war criminals from World War II.

Relations with the US

The new US Administration has confirmed that the Senkaku Islands are covered by the 1960 US-Japan Security Treaty, under which the US has pledged to come to Japan’s defence if its security is attacked. This is notwithstanding the fact that the US does not take a position on the sovereignty of the islands (this is also the UK position). The US supports the efforts of the Japanese Government to amend the country’s Constitution so that its military can play a more active role in the world.

Nonetheless, there remains an underlying anxiety in Japan that the US might one day begin to loosen these ties. These were intensified by the statements made by Donald Trump during the US election campaign, when he suggested that the US might withdraw its troops from Japan unless it bore more of the costs of stationing US forces and that Japan might need to develop its own nuclear weapons capability in future.

The new US administration has already withdrawn from the Trans-Pacific Partnership (TPP), to which Japan was highly committed (see also below). On the plus side, the new Secretary of Defence, James Mattis, has already indicated that the US has no immediate plans to ask Japan to pay more towards the costs of the US military presence.

Japan will welcome the new administration’s less enthusiastic view of relations with China – but does not want to see the kind of confrontation between the two countries that could destabilise the international order, let alone the Asia-Pacific region. Unlike President Trump, Japan is not interested in challenging the ‘One China’ policy.

Relations with the UK

The UK’s vote to leave the EU has left Japan less confident about future relations. The UK Government has sought to reassure Japan. In recent years, the two countries have had an increasingly close defence and security relationship.

Economic performance

As already mentioned, Shinzo Abe’s domestic political fortunes depend heavily on the country’s economic performance. Abe has been the architect of what is known as ‘Abenomics’, which is comprised of three strands, or arrows – an aggressive monetary policy, fiscal stimulus and structural reforms. These policies are intended to address the main shortcomings of the Japanese economy as described above: weak growth, entrenched deflation and high debt, as well as the country’s declining – and ageing – population.

GDP growth accelerated somewhat in 2016, and the outlook for 2017 remains relatively positive. In January 2017, the IMF estimated 2016 growth at 0.9% and forecast growth of 0.8% in 2017; higher than most estimates of the economy’s trend growth rate of around 0.5% (given Japan’s falling population among other things).

Nevertheless, for growth to be more sustainable, consumer spending will need to be a bigger contributor to growth. However, for that to happen wages will need increase at a faster rate than at present, particularly if consumer price inflation does eventually pick up (which would eat into real, inflation-adjusted, wage growth).

The final arrow of Abenomics – structural reform – is probably the most important (and difficult to implement) over the longer-term. It is made up of reforms to the labour market and deregulating some sectors of the economy. This is particularly important given the demographic challenges of an ageing population and the expected decline in the population over the coming decades.

Overall, most commentators think that the reform measures announced to date have not met the lofty expectations that the Abe Government set in 2013. Writing in mid-2016, The Economist said: “Progress has been incremental, at best, prizing breadth over depth”.

The Trans-Pacific Partnership

Another element of Japan’s growth strategy was the decision to join discussions on setting up the TPP, a free-trade area for 12 countries (including the US but not China) bordering the Pacific Ocean. The Japanese Cabinet Office estimated in 2013 that joining the TPP could boost Japanese GDP by 0.7% in a decade. In February 2016, a deal was formally agreed between the 12 nations accounting for around 40% of the world economy.

However, now that the US has pulled out, what happens next to the TPP is up in the air. It is possible that the TPP in a new guise without the US may be adopted, although there may be limited appetite for that, particularly in Japan given Prime Minister Abe’s description of the TPP without the US as “meaningless”.