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Home > Opinions Last Updated: 15:39 09/14/2007
September 14, 2007

Japan's Political Chaos and Economic Strength

Toshihiko KINOSHITA (Professor, Waseda University)

It might be said that Prime Minister Abe's resignation has already been anticipated and fully taken into consideration by many people, since the historic outcome in the Upper House election in July. Yet, the announcement on his resignation was so abrupt and untimely that it is having a chaotic impact on Japan's politics and society at large, and even on the international community. Aside from its timing, political chaos and uncertainties are being intensified anyway, well beyond a simple change of leadership within the ruling coalition, which has lost the majority in the Upper House. This should eventually lead to reorganization and reshuffling of all political parties in the long run.

This chaotic situation in politics could have a serious consequence on the management of the Japanese economy, when the external economic condition surrounding Japan is deteriorating due to the so-called "subprime problem," which is adversely affecting the global financial market and the real growth performance of the US and EU economies. In fact, a substantial slow down of those western economies is already under way and affecting the economic growth of the global economy, including Japan. Probably the most serious effect of the confusion in the global financial market on the Japanese economy may be through the Tokyo stock market, which is dominated by foreign investors, who are struggling to deal with their difficult position by selling their stock holdings to realize some of their profits in the Tokyo market. If a clear policy direction is not forthcoming soon, the resultant stagnation of the stock market could well affect Japan's economic growth negatively, at least in the short run.

Fundamentally, however, it is more likely that the Japanese economy will be able to continue growing steadily in the long run with increasing profits for many of the leading companies in such key industries as auto, electronics, machineries, chemicals, steel mills, shipbuilding, trading houses, marine transportation, etc., despite the possibility of prolonged domestic political chaos (some say that such chaos could be quickly settled by an unexpectedly emerging political leader, but we need to wait and see). This is because the current economic recovery in Japan has been primarily due to extraordinary efforts on the part of private companies partly supported by economic reforms, rather than conventional stimulative economic policies on the part of the government. Furthermore, many of the emerging market economies including BRICs and other resource-rich countries such as Canada and Australia are likely to maintain their growth performance, although they may not be unscarred by the current confusion in the global financial market. And these emerging economies are producing an increasing number of middle-class consumers, who will buy more consumer products from exporting countries, where Japan can offer many high-quality consumer products. Besides, those emerging economies are increasing their purchasing power to buy plant and equipment for their nation-building. They as well as rich Asians in Singapore, Hong Kong and China, having a lot of investment money, are gradually replacing American and European investors in Japan, particularly in the stock market and real estate businesses.

It is needless to say that the above scenario would be realized if certain conditions are met. One of the necessary conditions is that current reform movement be maintained, or at least not be reversed, to provide a favorable environment for private companies to grow and innovate on their own. Reform initiative is also important in rationalize Japan's problematic sectors such as agriculture for the purpose of advancing Japan's cause in forming FTAs and EPAs with emerging economies. Another condition is that some policy initiative is taken to address current economic problems such as widening economic disparities, failing pension systems, worsening fiscal deficit and stagnant productivity, which could not be automatically resolved in the market economy. Such problems would become even worse without active policies, which are unlikely to be adopted in the current political climate. This could in turn lead to a further confusion in politics, that is, a vicious circle of political and economic problems, even though Japan's macroeconomic performance appears to be steady and healthy.

Hopefully, political reorganization and reshuffling will take place and an effective political leadership will emerge in the foreseeable future, before the vicious circle of political and economic problems interferes with the macroeconomic performance substantially. In reality, it will take at least a few years to be able to see some clear directions in political reorganization and fundamental policy agenda to shape the future of Japan.

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