Japan’s New Prime Minister Yoshihide Suga could bring renewed energy for economic reform.
https://www.wsj.com/articles/japans-new-prime-minister-11600195666?mod=opinion_lead_pos4
Yoshihide Suga becomes Japan’s prime minister this week, having been elected leader of the ruling Liberal Democratic Party on Monday. His elevation comes at an important moment for the world’s third-largest economy, and presents new opportunities.
Mr. Suga succeeds Shinzo Abe, who resigned for ill health. He inherits an economy that contracted nearly 28% on an annual basis in the second quarter due to the pandemic. The 2020 Summer Olympics, intended to mark a national renaissance, were postponed. Tokyo has rolled out fiscal stimulus worth some $2.2 trillion, or 40% of gross domestic product—despite a debt-to-GDP ratio already at 230% before the crisis.
Mr. Suga seems set to respond by extending his predecessor’s reform program. Mr. Abe promised to revive the Japanese economy by firing “three arrows” of fiscal and monetary stimulus and policy liberalization. Only the first two arrows launched as hoped, although Mr. Abe did make progress on labor-law and corporate-governance reform and more open immigration. He also tried to negotiate high-quality trade deals such as the Trans-Pacific Partnership to spur domestic competitiveness.
Mr. Suga played a leading role in the development and implementation of this agenda as Mr. Abe’s long-serving cabinet secretary. Now he’s coming with ideas of his own, including an emphasis on reforming inefficient regional banks. Japan has too many and they earn too little profit. Mr. Abe’s monetary explosion hasn’t helped, and Mr. Suga has long believed that consolidation would boost their ability to lend to smaller companies. He also appears to want to remove policy hurdles to consolidation and mergers among smaller firms in the hope that this might stimulate productivity gains.
These may sound like small measures but such micro ideas can have a big impact. Japan effectively has two economies: a globally competitive, highly productive manufacturing economy comprised of large exporting firms, and a woefully unproductive, underinvested domestic services economy of small and medium-sized firms. Mr. Suga is aiming at the right target if he wants to fire reform arrows at that domestic economy.
In other ways his aim may be off. He seems more receptive to “fiscal consolidation”—finance ministry-speak for higher taxes—than was Mr. Abe. Mr. Suga has hinted he might be open to another increase in the consumption tax. Tokyo’s technocrats love this tax but every increase has triggered a downturn. Mr. Suga will do better to focus on economic growth as the best fiscal plan.
All of this matters because Japan needs a strong economy to face its other challenges. These include old threats such as North Korea and new dangers such as an increasingly aggressive China. Mr. Abe’s successes included deepening Japan’s relations with democracies around the world, and he understood that a strong economy is indispensable to Japanese security. Mr. Suga appears to believe the same, and now he has an opportunity to do his part to revive his country’s fortunes.
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