Canada: Abe’s Bold Economic Moves Are Good For Japan And Good For Canada

Last Updated: April 25 2013
Article by Len Edwards

Over the past two months, some unusual news reports have been coming out of Japan. In a country renowned for its measured, cautious decision-making, something revolutionary seems to be happening.

The country’s new Prime Minister, Shinzo Abe and his LDP government have taken some remarkably bold measures in an attempt to free the country from two decades of economic stagnation. While Japan is still the world’s 3rd largest economy, its standing as a global player in influence along with its self-confidence have been in decline for many years, a matter of concern to Canada and many other long-standing friends.

Canada needs to make it clear to Tokyo that we are pleased with these significant new moves to re-vitalize the Japanese economy. This is not just a case of congratulating for congratulations sake, although a little of that is always good in international affairs, especially in dealing with the Japanese who normally appreciate and remember such gestures.

It is because Canada stands to gain significantly from a re-bounding Japanese economy, not only through enhanced bilateral trade and investment, but because a stronger Japan lifts all boats in the Asia Pacific region where Canadians will be making an increasing share of their living in the coming decades.

A stronger performance from Japan will also give the global economy the kind of boost it badly needs as Europe continues to falter and the US and Chinese economies face their own headwinds.

Finally, a revitalized Japan is good for the geo-strategic evolution occurring in the Asia Pacific region. Japan’s new strength will better complement a rising China, and should help preserve the stable security environment in the Asia Pacific which since the end of the 1970’s has served as the essential underpinning for the region’s robust economic growth and rising standards of living.

Canada’s support of Japan’s efforts, joined with that of other friends and partners, particularly the United States (and including China), are also important for another reason: this long-awaited economic initiative by a Japanese government is not guaranteed of success.  Encouragement is needed.

Some sceptics have cautioned over the past weeks that Japan may have left it too late to pull off a reversal of fortune. They suggest that the culture of deflation is so embedded, and the economy so deeply flawed structurally, that even these strong steps, while enjoying some early traction, will ultimately fail to achieve the intended results.  The government’s debt load of about 220% of GDP is increasing as a result of the fiscal stimulus. Some see this as a ticking time bomb.

The Prime Minister’s ambitious set of initiatives – predictably given the moniker of “Abenomics” – has three policy dimensions: monetary, fiscal, and structural adjustment.

The monetary moves unveiled on April 4 by the new Governor of the Bank of Japan, Haruhiko Kuroda, have been especially bold.  Through some radical steps (for Japan) in monetary easing, he and Abe hope to rekindle inflation in the Japanese economy by essentially doubling the money supply, shooting for a 2% inflation target in 2 years. Investors and consumers will be motivated to spend by knowing that prices are going to be higher the longer one waits, not lower as under today’s deflationary scenario.

Judging from extent of the sea change in the Bank’s policies, and the fanfare it has generated, Kuroda understands the importance of exceeding expectations when it comes to affecting market behaviour. The announcement has further driven down the value of the Yen, which will stimulate exports and production, increasing wages and domestic spending.

More conventionally, the government’s 10.3 trillion yen (about $104 US billion) fiscal stimulus package in January is centered on infrastructure projects (the usual practice in Japan) and promoting private investment. It is hoped this will have a short-term effect of boosting GDP growth by 2%, although how efficiently it is spent will be crucial.  This will be a challenge, since such spending in Japan has more often catered to domestic political requirements than responded to national economic objectives.

While Kuroda’s moves have been the “headliners”, complemented by Abe’s solid fiscal stimulus, the greatest challenge for the Government lies in the area of structural reform.

This is where the most complexities lie, where deeply embedded business and economic practices have to be changed, and where vested interests will generate strong resistance, just as they have in the past. Yet this is where Japan’s success in revitalizing its economy will ultimately be determined.  Monetary and fiscal policy will bring short-term progress, but only structural change will ensure that a resurgent Japan becomes a longer-term reality.

And this is where Canadian interests come into play again.

Prime Minister Abe has embraced trade negotiations as one means of driving internal structural change.  Since the Meiji period, governments have used foreign pressures to force change at home --- the Japanese expression is “gaiatsu”. Abe seems to be reaching once again for this tried and true formula.

Abe’s trade policy agenda includes pushing ahead with talks launched by his predecessor, including one with Canada and an ambitious negotiation with the EU.  But in mid-March he decided to take Japan into the tougher Trans Pacific Partnership (TPP) talks as well.  This will increase pressures for substantial change, de-regulation and opening in many areas of Japan’s economy, especially in agriculture. Polls show that 60% of Japanese approve of the move.

As of this writing, the USA has just concluded an agreement with Japan that paves the way for US approval of Japanese entry into the TPP negotiations. Canada, New Zealand and Australia have still to give their formal approval, which they will now that Washington has signed on.

On the surface, this should all be good news for Canada.  We can now negotiate with Japan bilaterally and regionally, using both negotiations to get the best outcomes.  We will also be negotiating with Japan in a third venue: the soon-to-be-launched Plurilateral International Services talks in Geneva. The opportunities for improving conditions for Canadian business in Japan (and making Japan a closer partner in our own economy) have never been greater.

But there is one major challenge. Our bilateral negotiations are not the only game in town for the Japanese.  The Japan-EU negotiation, and the now the TPP, will make it harder to get and hold Japan’s attention.

This suggests we must seek to complete our bilateral deal quickly. Canada will need to keep the momentum up on these negotiations.  This is also in Japan’s interest: to put this agreement to bed quickly so they can move on to the big stakes elsewhere. If the months pass with little progress our bilateral negotiation could recede in importance for both sides.  This would be a pity.

Canada’s political and business leadership, starting with Prime Minister Harper and his senior ministers, must be active with their Japanese counterparts, pressing for an early bilateral agreement, and for success at all our negotiating tables. The role of Canadian business is especially important given the support that Japan’s business leaders have given to Abe’s trade initiatives.

And on the broader plane Canadians should encourage Prime Minister Abe and his Japanese allies, in both public and private sectors, to make the tough but critical decisions needed to re-vitalize their economy so that Japan can resume its place as a dynamic and positive force in the regional and global economies.

Canada’s own economic future will depend in some part on it.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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