Ishiba's Task: Make Japan's Vicious Cycle A Virtuous One

The unfavorable winds constituted a combination of high energy prices and a falling yen exchange rate, which defeated the old scourge of deflation but replaced it with declining real incomes as prices rose faster than wages.

Now the rate of price inflation is slowing and the yen exchange rate is rising in value against the dollar. This is being reinforced as the US Federal Reserve Board is cutting its interest rates quite aggressively to help avoid an American economic recession and the Bank of Japan has made clear it will be raising its own interest rates in due course.

This means that the gap between dollar and yen interest rates looks destined to narrow, which tends to help the yen rise in value.

The new prime minister's early weeks in office look to be a period during which incomes at last rise faster than prices, which is one reason why Ishiba's immediate decision to call a general election for the powerful Lower House of the Diet (parliament) on October 27 could prove a good one.

Ishiba has, anyway, long been popular with voters. Despite being an LDP veteran, he has positioned himself as a bit of a maverick outside the party's establishment – a virtue which will become somewhat neutralized by his being prime minister and party leader, the longer he is in office. So it is better to hold the election while he is new in the role and has not had the chance to disillusion people, especially with the economic winds turning in his favor.

That produces the second reason why some change might occur: if the LDP wants to do well in that election and maintain its parliamentary strength, it will need to offer voters some evidence that it has new ideas. And if it succeeds, the post-election government will have a mandate to implement them.

The third and final reason is that the leadership election has shown that the old guard of the LDP understands that it needs to display clearly a willingness to change. The kingmakers may have been two former prime ministers, 84-year-old Taro Aso and 75-year-old Yoshihide Suga, but the field they oversaw made plain that they realized that the next leader had to be either from a new generation or a woman or a maverick.

The party chose the 67-year-old maverick, probably because he is popular with voters and, despite that“maverick” image, is actually more mainstream than his main rival in the second round of voting, Sanae Takaichi.

So what should the new prime minister actually do?

There is no policy tool available that can achieve a rapid impact. However, a new direction can be set for policies that will have their impact over several years as long as that direction is clear and credible.

From the point of view of ordinary citizens, the most important issues concern their employment, their incomes and their taxes. From the point of view of the Japanese economy, that is also true: The most debilitating feature of the economy has long been the weakness of household consumption, which has been depressed by low incomes, insecure employment and high taxes.

Another way to describe this is that for more than 25 years Japan has been pursuing a cheap labor strategy. Wages have been depressed and jobs made insecure to maintain the competitiveness of Japanese businesses. But it has failed, for it has led to stagnant domestic demand, which discourages innovation, productivity enhancement and investment.

The priority for the new prime minister must be to turn this negative cycle around and replace it with a positive one. Simple steps such as the abolition of tax rules that penalize married women who earn more than a limited income can offer an easy beginning.

Sign up for one of our free newsletters

• The Daily Report Start your day right with Asia Times' top stories
• AT Weekly Report A weekly roundup of Asia Times' most-read stories

A harder step, because it is opposed by labor unions and big businesses, would be to strengthen enforcement of the rights of irregular workers while also making it easier for regular workers to change jobs by making pension rights more portable and allowing contracts to provide for pre-agreed compensation for termination of employment so as to limit legal disputes.

If Japan's“new form of capitalism” could be one in which incomes rise faster than prices and people were able to change jobs easily mid-career and exploit the labor shortage, then a virtuous cycle could begin.

The basic“metabolism” of corporate Japan has already shown signs of changing, with more start-ups and risk-taking, but it needs further help. If that can be done, replacing a cheap labor strategy with a high-wage one, then tax revenues will rise, making it easier to finance the defense build-up plan that the new prime minister has inherited from his predecessors Kishida and Abe, and making the transition to greener energy easier to implement.

Let us wish Prime Minister Ishiba the best of luck in this task of replacing the country's vicious cycle of low growth and depressed consumption with a new, much more positive and virtuous one. Then, we Europeans might even be able to learn something about how to turn recommendations into reality.

Formerly editor-in-chief of The Economist,
Bill Emmott
is currently chairman of the
Japan Society of the UK , the
International Institute for Strategic Studies
and the
International Trade Institute .

This is the updated English original of a column published by Mainichi Shimbun in Japan and on the Substack Bill Emmott's Global View . It is republished with permission.

Already have an account? Sign i Sign up here to comment on Asia Times stories OR

Thank you for registering!

An account was already registered with this email. Please check your inbox for an authentication link.