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Japan's PM risks bankruptcy

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Shinzo Abe, now six months into his second try at being prime minister of Japan, is a puzzling man. In his first, spectacularly unsuccessful go in 2006-07, he was a crude nationalist and an economic ignoramus who rarely had control of his own dysfunctional cabinet. By the time he quit, after only a year in office, his popularity rating was below 30 per cent and his health was breaking down.

Last December, his Liberal Democratic Party (LDP) won a landslide victory in the elections for the lower house of the Diet (parliament), and as party leader, he became prime minister again -- but what a difference six years makes. He's still a radical nationalist who on occasion comes close to denying Japan's guilt for the aggressive wars of 1931-45, but in economics, he is now Action Man. His approval rating is currently over 70 per cent.

In only six months, Abe has broken most of the rules that defined Japan's budgetary and monetary policy for the past 20 years, and he has promised to break all the old rules about restrictive trade policies as well. (Together, his new policies are known as "Abenomics.") He has launched a make-or-break race for growth that only the boldest gambler would risk. Who is this guy, and what happened to change him so much?

A resident foreign academic with long experience of Japan once told me that there were only around 400 people who really counted in Japan: They would all fit into one big room. Most of them would be there because their fathers or grandfathers had also been there, and Shinzo Abe would certainly be one of them.

Abe's grandfather, Nobosuke Kishi, was a member of General Tojo's war cabinet in 1941-45, a co-founder of the LDP in 1955 and prime minister from 1957-60.

But heredity does not guarantee competence, and on his first outing in power, Shinzo Abe was an embarrassment to the LDP. He has obviously acquired some braver and perhaps wiser advisers since then, most notably Yoshihide Suga, now chief cabinet secretary.

Abe put several ultra-right-wing ministers in the cabinet, and it is Suga's job to keep them from giving voice to their revisionist views on history.

"Our cabinet will adopt a unified perception of history," he told them. "Make no slip of the tongue, because it would immediately cost you your post."

He also polices Abe's own tongue. No more remarks like: "It is not the business of the government to decide how to define the last world war" or "comfort women were prostitutes."

Abe doesn't mind, because he has bigger fish to fry this time around. He has launched a high-risk strategy to break Japan out of 20 years of economic stagnation by cutting taxes, raising government spending and flooding the economy with cash.

One of his first acts was to put his own man in as head of the Bank of Japan and order him to break the deflationary spiral by adopting a target of two per cent annual inflation.

He has also promised to smash the protectionism that has hampered the Japanese economy for so long, although this will require him to take on the powerful agriculture and small-business lobbies.

He has even promised to join the Trans-Pacific Partnership (TPP), an American-led effort to liberalize trade in the region, in order to guarantee the structural reforms will continue.

Structural reforms will have to wait until Abe also has a majority in the upper house of the Diet, which he confidently expects to win in the July elections, but already his strategy is showing results. Economic growth in the first three months of this year equates to about 3.6 per cent annually, more than four times higher than the long-term average of the past two decades, and the Japanese stock market is up 80 per cent since January.

The strategy is high-risk because Japanese government debt is already the highest in the developed world: 240 per cent of gross domestic product. If the surge in growth does not last, the government's income from taxes will not rise (it is no higher now than it was in 1991) and in a few years the debt will soar to an unsustainable level. The country will essentially go bankrupt.

Of course, the surge may persist; creating a perception of vigorous growth is half the battle. But why take such a risk? Probably because Abe is keenly aware that Japan had the world's second-biggest economy when he was prime minister the first time, and now it's only the third-biggest. The country that overtook it was China.

For 1,000 years, China was the dominant power in Eastern Asia. Japan wrested that role from it in the late 19th century, but now it's going back to its natural home -- and Abe would do almost anything to prevent that. That's why he takes such a hard line on the dispute between the two countries over the Senkaku/Diaoyu Islands. But much more importantly, he must get the Japanese economy growing again, or the country will end up far behind China.

To avoid that, he will take any risk.

 

Gwynne Dyer is an independent journalist whose articles are published in 45 countries.

Republished from the Winnipeg Free Press print edition May 22, 2013 A10

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