Can Shinzo Abe kickstart the Japanese economy?

With a 117 trillion yen (£877bn) stimulus announced on 27th May, to be funded by the second supplementary budget in two months, Japanese Prime Minister Shinzo Abe hopes to kickstart Japan’s economy back into activity.

In May, the world’s third-largest economy entered recession, shrinking by 3.4 per cent in the first quarter of 2020, after a 6.4 per cent decline in the last quarter of 2019. Then, it was Typhoon Hagibis and a consumption tax hike that depressed consumer demand; in 2020 came the evaporation of Chinese demand as the country tackled Covid-19.

With the global pandemic taking hold in March and Japan’s own state of emergency, which the prime minister lifted two days before the stimulus package, the economic prospects for the second quarter look bad. Gross Domestic Product is predicted to fall by up to 20 per cent—a trillion dollars.

This is a grim outcome after seven years of “Abenomics,” aimed at stimulating the economy back to steady growth under stable political management. What is the right way forward for a major industrial power facing a pandemic-induced contraction of this kind? The need is to keep Japanese business afloat, and the stock markets rising. The two assistance packages announced since April totalled just under 234 trillion yen and have been accompanied by a government/Bank of Japan joint statement guaranteeing close co-operation to support struggling firms, with the Bank promising to buy yet more government debt to keep bond yields down.

The money will help finance companies in difficulties, subsidise rents, provide assistance to local economies and fund additional healthcare provision. A small amount is going to help Japanese firms move their supply chains away from China, although Japanese officials are quick to stress that this is simply sensible diversification—and not an anti-Chinese measure.

Japan’s public debt/GDP ratio is the highest in the world, and has been for more than a generation. Now is clearly not the moment to worry about adding more to the debt pile: as Finance Minister Taro Aso has said: “We are determined to protect the Japanese economy.” Some analysts see a third package as a possibility. There is loose talk in some quarters of a credit downgrade, although Japan’s ability to borrow mainly from itself for pump-priming activity, and the cash-rich status of most major Japanese companies, still encourage investors to see Japan as a long-term prospect rather than a short-term risk.

None of this hyperactivity, however, is helping prime minister Abe politically. Over last weekend his popularity ratings fell to their lowest level in two years—just under 40 per cent. This is partly because of a recent scandal, involving the resignation of the chief of the Tokyo prosecutor’s office, alleged to be close to Abe’s administration, for breaking lockdown restrictions to enjoy a gambling night out with journalists. But it is also related to the Covid-19 response.

Although Japan is internationally seen to have weathered the pandemic better than many countries, with at time of writing under 900 deaths and much lower mortality per capita than the US or Britain, there seems to have been little confidence in the government’s ability to respond to the crisis.

Many of the criticisms of inflexible and slow bureaucracy that emerged at the time of the 2011 earthquake and tsunami have re-surfaced again—particularly relating to the authorities’ reluctance to carry out large-scale testing on the Korean model, or even on anything like the scale of the much-criticised British system. Four-fifths of the population think that government aid for individual households also been distributed too slowly.

At the heart of the feeling that everything took too long—the decisions to impose restrictions, invoke a state of emergency, close schools and places of entertainment—is a sense that the government was distracted by the fear that too draconian a response would call into question Tokyo’s hosting of the Olympics and Paralympics in August this year.

This simply put off the evil day. As the pandemic spread across the world, and firms began restricting their own staff’s movements and international travel, it became inevitable that major sporting events would fall victim to the virus—and so indeed it proved, with the postponement of both tournaments to 2021 announced on 23rd March. Abe’s administration is paying a reputational price for not biting this bullet—or forcing the IOC to do so—sooner.

There is no obvious alternative to the governing Liberal Democratic Party (LDP), which still leads in the polls, with 37 per cent support and no other party anywhere close (although 36 per cent support “none of the above”). Nor to Abe himself, although his position, as he approaches his last year as LDP president, is increasingly difficult—boxed in on the timing of the next election, which can’t easily be held in 2021, with local Tokyo elections before July and the Olympics in the summer, and for which this autumn, in the wake of the Covid-19 crisis, also looks unpromising.

And the prime minister must be haunted—as all politicians facing elections are haunted—by the double fear of a second spike in infections, and a collapsing economy. Spend, spend, spend has to be the order of the day.