What next for Japan and Asia?

The election consolidates power and paves the way for bold changes. Will “Abenomics continue?” What could a resurgent Japan mean for others in Asia?

Optimism is palpable. Since Abe came into office at the end of last year, the economy has grown 4.1 per cent, and the stock market has hit peaks as much as 80 per cent higher. These numbers have been driven by stimulus – with the Bank of Japan’s quantitative easing and increased government spending as the first and second “arrows” of Abenomics. 

Now comes the third and hardest part: structural reform and increasing productivity. Priorities include bringing women into the workforce, educational reform, emphasising innovation and cutting red tape. Financial consolidation and raising tax revenue is also critical, given the high level of public debt. 

None of this is easy, and will be resisted by vested interests. That’s one reason past efforts stalled. Some believe Abe will back away too.

There is suspicion that his true goal is not economic reform but to raise Japan’s security capacity. Already the premier has mentioned revisiting the country’s pacifist constitution – a move controversial both at home and abroad. Already some in Beijing accuse Japan of building up naval and other defence forces to target China.

Pursuing security ambitions will dissipate Abenomics and should be resisted. With contention over the Senkaku/Diaoyu Islands, the possibility of incidents at sea cannot be ruled out. Even short of that, Sino-Japanese turbulence can spill over and negatively affect Asian cooperation. 

Much will depend on US policy. But others in Asia will do well to tell Tokyo that tensions are not appreciated. The present need is for dialogue on financial policies – both Asian giants are adjusting credit and other economic tools at the same time and the yen-yuan relationship could have outsized effects on the region.

Asians should encourage Abenomics. This can come through economic agreements – the US-led Trans Pacific Partnership (TPP) and the Regional Comprehensive Economic Partnership (RCEP), which is centred on Asean and brings in all major Asian countries. Tokyo is a key player, given that the US is not in RCEP, and China stands outside the TPP. Concessions garnered in the agreements can help Abe push through the pain of structural changes, with the agreements serving as external anchors to domestic reform. 

Reform and these economic agreements can fundamentally transform not just Japan’s domestic economy but also how it relates to the rest of Asia and especially Asean. 

Take investments: Abenomics is triggering a resurgent interest in Asean. Early signs include Toyota’s US$2.7 billion commitment to expand production facilities in Indonesia. Another ongoing Japanese multi-billion-dollar bid is by the financial group MUFG to buy Thailand’s Bank of Ayudha. 

There is also potential for more two-way flow, for other Asians to invest in Japan. Deregulation and a single window of procedures will be needed. But if the yen is lower and stable, and the economy growing, Japan will have its attractions. Reform can also gradually open the society for more Asians with skills to work and study there, increasing people-to-people contact.

Although China and South Korea have closed the gap in the past decade, a reforming Japan can respond and set the pace. Already a softer yen has made South Korean companies complain about their eroding price competitiveness in export markets. In some areas, Japan offers a combination of technology, know-how and low-cost capital that China cannot match.

When he came into office, Abe made the point of visiting Asean countries first. A new Japanese-Asean partnership can be forged. Yet even if Abenomics succeeds (and there remain doubts), there is no return to the days when Japan invested in Asean for cheap land and labour, and dominated the region with little competition. China and South Korea have emerged and will remain important. Many Asean countries and corporations have also made significant progress towards equality. 

A revitalised Japan will benefit the region but its future relationship with a rising Asean must be more two-way, and woven into the wider regional integration. 

 

Simon Tay is chairman of the Singapore Institute of International Affairs and associate professor at the National University of Singapore’s Faculty of Law.