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Deal with economy, China to ensure Japan can rise again

Publication Date : 01-01-2014

 

Japan must be saved from drowning in the sea of deflation, a challenge essential for putting its economy onto an upward trend.

Doing so will definitely require success in achieving the targets set in Prime Minister Shinzo Abe’s economic policy line, known as Abenomics, through efforts to ensure his administration is kept running even more stably.

With this in mind, the government should place priority on economic growth over fiscal reconstruction for the time being, a task necessary to revitalise the economy and increase tax revenue.

This must be accompanied by efforts to disburse financial resources in such fields as pensions, medical and other forms of social security, along with national security, crisis management and energy. Success in that endeavour is indispensable for boosting Japan’s national strength from the mid- and long-term standpoints.

In promoting good external relations, the government needs to ensure stability in the Asia-Pacific region. China has been escalating its high-handed behaviour in the East China Sea and in the sky above the area in recent months. Few eyebrows would be raised if an accidental conflict erupted between Japan and China at any time. This situation will likely continue for the foreseeable future.

Perceived military tensions in this region must be relaxed through repeated dialogue between Japanese and Chinese diplomatic and defence authorities, coupled with efforts to improve the functions of the Japan-US alliance.

The economy and China will likely be the two major focuses of government policy this year. Failure to squarely confront the two tasks—one domestic, the other external—will render useless any attempt by Japan to start rising to prominence, economically or otherwise.

Crunch time for Abenomics

One year has passed since Abe inaugurated his second Cabinet. The prime minister was at the forefront of his ruling coalition’s victory in the House of Councillors election last summer, a triumph that sealed an end to the divided Diet. This has enabled the Liberal Democratic Party to emerge as the sole dominant power in the political arena, reducing all other parties to lesser forces.

His Cabinet has consistently enjoyed a high popular support rating. Despite a drop in the rating due to turmoil arising from the enactment of the state secrets protection law during an extraordinary Diet session last year, the figure still stands in the 50 per cent range. This should be solely attributed to Abe’s focused efforts on economic recovery, a task that comes first in the list of his policy priorities.

The prime minister’s pursuit of his Abenomics policy is accomplishing a certain degree of success. This is evident in the fact, for example, that two of the three pillars stipulated in his policy—bold monetary relaxation and flexible fiscal stimulus—have apparently caused the economy to pick up. This has been accompanied by realising higher stock prices and a decline in the value of the yen. There is no doubt that the current situation has helped make Japan’s presence felt more strongly in the international community.

However, it is still uncertain whether—and how, for that matter—the Bank of Japan will be able to bring the annual price increase rate to 2 per cent, a target set by the central bank to overcome protracted deflation. Furthermore, there is a limit to how long the benefits of the fiscal measures taken by the government to underpin the economy will endure. The Abe Cabinet’s high support rating is primarily because the public expect he will be able to recharge the economy. His high popularity does not mean people actually feel their living conditions are improving under the current administration.

Given this, the Abenomics policy will be tested over whether it can truly achieve its purpose this year.

The prime minister’s decision in October to implement a consumption tax rate hike, as initially planned, means the rate will rise from 5 percent to 8 per cent in April.

The economy will likely remain more or less upbeat until the end of March, partly due to last-minute rise in demand for such commodities as consumer durables. In April and beyond, however, the economy could take a downturn due to dampened consumer appetite in reaction to the tax rate increase.

To minimise the effect of the tax hike on consumption, the government put together an economic stimulus package worth about 5.5 trillion yen (US$52 billion) at government expense, the main pillars of which include financial and other support for business corporations and public works projects. With a similar purpose in mind, the government has devised a bloated budget for fiscal 2014.

However, we think the package is less than satisfactory when it comes to supporting ordinary household finances. It includes a one-shot financial support for low-income households, or what the government calls “simple benefit payment.” Meanwhile, the government decided not to introduce a lower tax rate for such essential goods as foodstuffs and newspapers. We hope the government and the ruling parties will prepare to introduce a mitigated tax rate system covering such necessities when a planned rate hike from 8 per cent to 10 per cent is implemented.

Abe must lead from front

The third pillar of Abenomics calls for translating a growth strategy into action. Success in ensuring the government’s growth strategy fulfills its aim is essential for accomplishing a sustainable economic growth led by the private sector, aided by job creation and higher wages that could be made possible through Abenomics.

However, it is uncertain whether the growth strategy will accomplish its goal. This was underlined by the large cut in the number of deregulatory steps to be implemented in what are called national strategy special zones, due to objections from various government offices and organizations that would be affected by this deregulation.

The prime minister should play a leadership role in encouraging the private sector to inject its vitality, economic or otherwise, into growth markets, thus accelerating the effects of the third pillar of Abenomics.

A recent rise in consumer prices cannot be considered a favorable trend triggered by increased demand, given that a surge in the prices of imported goods and higher electricity bills are major factors behind the situation. A favourable cycle—in which private corporations buoyed by improved business performance raise wages for their employees, which in turn improves family budgets and leads to increased consumption—must be created.

Success—or the lack thereof—of this policy depends on whether a stable supply of inexpensive electricity will be secured.

Operations at all 50 reactors at nuclear power plants in Japan remain suspended. As things stand, the nation must shoulder a hefty 10 billion yen ($95 million) in additional costs for imported fuel for power generation such as liquefied natural gas each day. The additional burden is to operate thermal power plants to their fullest, thus making up for an electric power shortage while nuclear power reactors remain idled. This is an extra drain of national wealth to energy resource exporting countries.

Nuclear power stations must be steadily brought back online once they have been confirmed safe to operate.

One worrisome factor is the delay in the Nuclear Regulation Authority’s safety checks that must be conducted before nuclear reactors can be brought back online. Given the time needed to obtain consent from local governments concerned and other necessary procedures, the reactors now being screened will be able to resume operations in summer at the earliest.

With its low energy self-sufficiency rate, how Japan ensures a stable supply of electricity will be directly linked with its national strategy.

The Abe administration plans to position nuclear energy as an “important basic energy source” in its basic plan on energy to be adopted by the Cabinet in January. We support the administration’s decision to drop the Democratic Party of Japan’s irresponsible “zero nuclear power” policy, leaving open the possibility of building new nuclear power plants or reactors.

Japan possesses some of the world’s most sophisticated nuclear technologies. Constructing safe, next-generation nuclear power stations is also necessary from the viewpoint of maintaining and nurturing human resources in this field. The nation also needs to expand exports of nuclear power infrastructure to boost economic growth.

In addition, the government must accelerate discussions on preparing an optimal combination of nuclear power, thermal power, solar power and other renewable energy sources.

Accidental clashes

China is attempting to change the status quo in the Asia-Pacific region by force, intensifying friction with its neighbours.

Touting a policy of increasing wealth and military power it has labelled the “Chinese dream”, the administration of Chinese President Xi Jinping is increasingly conducting naval and airspace drills with its fleet and aircraft in the West Pacific, and strengthening its effective control of the South China Sea. China’s anti-access area-denial strategy against the United States is poised to bear fruit.

As for Japan, Chinese state vessels are stationed almost around-the-clock around the Senkaku Islands and repeatedly intrude into Japanese waters. Its unmanned aircraft fly over Japanese waters. Furthermore, it unilaterally declared an air defence identification zone over the East China Sea that included the Senkaku Islands.

China has demanded that all aircraft flying within the ADIZ submit flight plans in advance, and threatened to adopt “emergency defensive measures” by the Chinese military against any plane that refuses to obey its instructions. We think it is extremely problematic that China treats the ADIZ like its territorial airspace.

If this situation remains in place, Japan could become entangled in a military clash. The two countries urgently need to set up a liaison mechanism to help prevent an unexpected situation from erupting between the Self-Defence Forces and the Chinese military.

China must not use Abe’s recent visit to Yasukuni Shrine as an excuse to refuse dialogue with Japan.

It will also be important to hold China in check by deepening the Japan-US alliance.

The United States maintains the position that the Senkaku Islands fall within the scope of Article 5 of the Japan-US Security Treaty, which stipulates US defence obligations to Japan. To ensure this article functions without fail, Japan will need to boost the roles it can play with the United States.

It is timely that the Abe administration will review the Japan-US defence cooperation guidelines at the end of this year.

The new guidelines should stipulate what additional assistance the SDF can provide to US forces and the US forces’ expanded involvement in the defence of Japan’s remote islands such as the Senkakus so Tokyo and Washington can jointly operate smoothly and handle any crisis as it escalates from a time of peace to a contingency.

It will also be unavoidable for the government to change its interpretation of the Constitution to enable Japan to exercise its right to collective self-defence.

The government and the ruling Liberal Democratic Party are considering a new interpretation under which exercising the right to collective self-defence will be part of the “minimum necessary” exercise of force for self-defence. Given the worsening security environment surrounding the country, expanding the scope of what constitutes the “minimum necessary” exercise of force is quite understandable.

Along with the right to collective self-defence, it will also be necessary to deepen discussions on the right to individual self-defence. For instance, if intruders disguised as fishermen unlawfully occupy a remote island, a development that does not reach a military attack, how would the SDF respond? It will be necessary to spell out rules on the possible use of weapons in a scenario like this that could be described as the exercise of “the minor right to self-defence.”

Contribute to regional stability

The relocation of the US Marine Corps’ Futenma Air Station in Okinawa Prefecture recently saw a development. Okinawa Gov. Hirokazu Nakaima has approved the central government’s request to carry out a land reclamation project in waters off the Henoko district in Nago in the prefecture, a necessary step for ultimately relocating the air station to the district. His decision has cleared the path for an issue that has remained unresolved between Japan and the United States since 1996.

Relocating the air base to Henoko would significantly reduce the burden Okinawa Prefecture shoulders by hosting US bases, and enhance the deterrent provided by US forces.

In December, the government decided on its first National Security Strategy. It urges China to play responsible and constructive roles for peace, stability and prosperity in the region. It also stipulates that Japan will continue to respond firmly but calmly against China’s attempts to forcibly change the present situation.

With its birthrate declining and population aging, China’s working and manufacturing populations have started to decline. Under these circumstances, will China’s economic growth slow? How long will the United States place priority on the Asian region? How will such changes affect Japan’s security and economy?

Unlocking the answers to such questions will require analysing information and drawing up strategic policies toward China.

In the mid- and long-term, it is crucial for Japan to continue to contribute to the region’s security. In cooperation with the United States and members of the Association of Southeast Asian Nations, Japan must continuously persuade China to be aware of its responsibilities as a member of the international community, and to act accordingly. That is a key duty of Japan.

 

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