Why Japan's Kishida Finally Called It Quits

All three Japanese governments that ruled since late 2012 prioritized yen depreciation over moves to increase competitiveness. More aggressive quantitative easing took the pressure off politicians to level playing fields. It took the onus off CEOs to innovate, restructure and swing for the fences.

That's now backfiring on Kishida spectacularly. In many ways, he's paying the price for the yawning gap between what Abenomics promised and where Japan finds itself in 2024. The fact that wage gains are still trailing inflation, generally speaking, amid a once-in-a-generation stock boom says it all.

Kishida's other problem is the wide gap between corporate pledges to hike wages and actual gains. Earlier this year, labor unions were thought to have scored a once-in-generation wage gain. The reality may end up being quite different.

“The 'shunto' spring wage negotiations produced a three-decade record result, but actual pay gains recorded across the economy have been disappointing,” says Stefan Angrick, senior economist at
Moody's Analytics.

What's more, he adds,“industrial production stalled in the second quarter and wage gains lack oomph, both of which move the recovery further into the distance.”

All this has given the BOJ a case of rate-hiker's remorse. As Governor Kazuo Ueda's team has signaled since the July 31 decision to raise rates to 0.25%, further tightening steps are off the table for now.

Where all this leaves the Tokyo political establishment is anyone's guess. The list of possible Kishida successors includes: Digital Minister Taro Kono; former Defense Minister Shigeru
Ishiba; LDP Secretary-General Toshimitsu
Motegi; former Foreign Minister Yoshimasa Hayashi; former Environment Minister Shinjiro
Koizumi; and Economic Security Minister Sanae
Takaichi.

As of now, none of the above is a clear front-runner. In fact, the weeks between now and the September LDP election process will see the most frenetic political jockeying in Japan in many years.

The trouble, of course, is that none of the obvious candidates is known to be an economic reformer. That's a problem, considering that the LDP has largely squandered the last 12 years during which it had a wide window of opportunity to remake Japan.

When Abe won the premiership for a second time in 2012, he took office armed with three things that no modern Japanese leader ever had before: an economic blueprint voters supported; high approval ratings; and plenty of time to implement it (Abe held office nearly eight years).

Now, Kishida is paying the price for LDP inaction over the last 4,249 days. Sure, Kishida bears responsibility for his approval ratings being stuck in the mid-to-low 20s. But he's also being weighed down by the cumulative effects of the ruling party's failure to raise Japan's economic game.

Kishida isn't without his wins. A big one is raising defense spending to a record 7.95 trillion yen (US$54 billion), or close to 2% of gross domestic product. This accomplishment will come in handy should Donald Trump win another stint in the White House. In his first term as US president from 2017 to 2021, Trump agitated for allies to up military spending .

Yet the economic zeitgeist that wages are lagging inflation is dominating. Here, Kishida did himself few favors by slowing-walking moves to reinvigorate the reform process.

This includes some of Kishida's own ideas. In October 2021, Kishida promised a“new capitalism” to upend Japan Inc. and redistribute wealth toward the middle class.

Kishida also proposed to open a path for the US$1.5 trillion Government Pension Investment Fund, the world's largest such entity, to finance a startup bonanza. Along with tapping
GPIF, Kishida sought to woo foreign investment.

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But little came of“Kishidanomics.” The state of play as Kishida bows out is that inflation is bigfooting wage gains. This is largely a side-effect of Abenomics, which shaved a third off the yen's value.

Along with enabling complacency, it left Japan uniquely vulnerable to importing inflation amid heightened energy and food prices. The fallout from Covid-19, Russia's invasion of Ukraine and rising Middle East tensions hit Japan particularly hard.

Japan suddenly has the inflation it has been trying to generate for 25 years. But it's the“bad” kind that depresses consumer confidence and business investment. This predicament tarnished Kishida's economic legacy.

Political finance scandals are never helpful, of course. But the sword on which Kishida is falling stems from an economy not living up to the lofty promises of the last 10-plus years. Promises that won't be easy for the LDP's next leader to keep as China's economy slows and US growth shows signs of strain.

On Wednesday, Kishida said, without irony, that
“in order to fully emerge from a deflation-prone economy, we must accelerate wage and investment growth, and ensure we achieve our goal to expand Japan's gross domestic product to 600 trillion yen ($4.10 trillion).”

If only the LDP had done that, Japan might actually be booming. And it might not be having to pick its fourth prime minister in less than 12 years. Suffice to say, that to-be-named leader might be set up for economic success.

Follow William Pesek on X at @WilliamPesek

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