Why Japan’s Economy May Surprise Us In 2022

Though off to a decent start, Japanese Prime Minister Fumio Kishida faces a 2022 of profound challenges.

Between Covid-19, sluggish economic growth, and geopolitical tensions with China, Kishida shouldn’t expect many calm moments in the year ahead. Oddly, though, Kishida’s biggest dilemma might be managing his relationship with Liberal Democratic Party kingpin Shinzo Abe.

Japan’s longest-serving leader stepped down in September 2020 amid scandals and outrage over a weak pandemic response. Even so, Abe remains the behind-the-scenes powerbroker calling many of the shots in Tokyo. Kishida owes his premiership to “Shadow Shogun” Abe, who favored him over more popular rivals.

Now, though, Kishida risks outshining Abe as a reformer. While Kishida outperforming would be great news for Japan’s 126 million people, it would mean crossing the thin-skinned Abe. In Tokyo’s factional politics, it’s not a reach to think Team Abe might try to limit Kishida’s room to operate.

That’s particularly so if Kishida continues to take a less confrontational tack toward China, South Korea and rewriting Japan wartime history than Abe and his predecessors.

For the moment, let’s look at why Kishida has exceeded the rather low expectations voters had when he assumed power in October.

Right out of the gate, Kishida built on his immediate predecessor’s success in upping Japan’s vaccination rates. Whereas Abe dragged his feet, the government of 2020-2021 Prime Minister Yoshihide Suga raised Japan from Covid zero to hero. Today, Japan boasts a 78% vaccination rate.

In less than three months, Kishida has articulated a clearer path to raising Japan’s economic game than Abe did in nearly eight years. For all its great press, Abenomics mostly prodded the Bank of Japan to open the monetary floodgates to give “trickle-down economics” another try.

Kishida is devising a “new capitalism” plan to redistribute wealth toward the middle class. It includes incentivizing companies via tax benefits to share profits with workers. He’s also looking to cajole CEOs to swing for the economic fences with new research-and-development expenditures.

The plot thickens when you consider the noises coming out of the BOJ that Abe restaffed back in 2013. Abe’s hand-picked governor, Haruhiko Kuroda, did all the heavy lifting. Most of it was aimed at a 30% drop in the yen versus the dollar.

In recent days, Kuroda expressed a change of heart, realizing that the costs of currency devaluation outweigh the benefits.

“The yen’s depreciation might have an increasing negative impact on household income through price rises,” Kuroda told business leaders last week.

Yen declines make Japanese goods more competitive overseas and boost profits that companies earn overseas. But a weak yen pushes up import costs, damaging households and domestic retailers.

“A quantitative analysis by the bank’s staff shows that the effects of the yen’s depreciation in terms of pushing up prices of durable goods have increased in recent years,” Kuroda said.

It’s worse than that: the growth boost from weak exchange rates removed the urgency for Abe to implement disruptive structural reforms. Abe shelved plans to loosen labor markets, catalyze innovation, reduce bureaucracy, increase productivity and empower women.

The lack of muscle-building early in the Abe years left Japan extra-vulnerable to Covid recessions. Enter Kishida, who’s endeavoring to finish what Abe promised to start.

First, of course, there’s a need to support the economy in the short run. Last week, Kishida’s cabinet approved a record $940 billion budget for the next year’s aim of achieving growth and wealth distribution under his new capitalism agenda. It’s Japan’s biggest-ever initial spending plan, underlining a pivot from fiscal consolidation to a more sustainable gross domestic product rate.

Japan, the third-largest economy, shrank 3.6% year-on-year in the July-September quarter amid a surge in Delta variant Covid-19 cases. That slammed consumption, which makes up more than half of the economy. Kishida’s government estimates growth of 3.2% in fiscal 2022-2023, up from an earlier estimate of 2.2%, which provided the basis for the budget plan.

Yet might the Abe old guard take umbrage at Kishida outshining their man? Such pettiness—and sabotage—would be in keeping with the LDP’s factional ways.

With any luck, Kishida can be his own man. This would mean putting some big economic reform wins on the scoreboard. It means distancing himself from Abe’s nationalistic tendencies which drove a wedge between Japan and Asian neighbors.

Kishida succeeding is easier said than done. If he does, Japan’s economy could surprise the globe in 2022. And in a good way, for a change.