Shinzo Abe may be gone, but Abenomics will stay on. The long-serving prime minister of Japan resigned on Friday. Two of the three arrows of his eponymous reforms are well established. The third, the growth arrow, has flown less high. The next prime minister will find it hard to get over the challenges of the current pandemic and long-term demographic trends.
A longstanding chronic inflammatory disease left the 65-year-old Abe unable to do the job. Although two recent hospital visits had fanned rumours of a resignation, reports of an imminent announcement sent Japan’s benchmark stock index down over two per cent. The yen strengthened too. Those moves suggest that investors fear Abe’s successor will bring less growth and more deflation.
Such concerns look exaggerated, or at least premature. The current momentum of the monetary and fiscal arrows of Abenomics is too strong for a mid-flight correction.
On the monetary side, central bank boss Haruhiko Kuroda will probably stay the expansionary course on yield-curve control and negative interest rates. Fiscally, the next government will have no reason to reverse Abe’s massive stimulus package, equivalent to 40 per cent of GDP. Without that, anti-pandemic lockdowns and weak global demand, which brought an annualised 27.8 per cent rate of GDP decline in the June quarter, might bring the sort of recession that could threaten the dominance of Abe’s Liberal Democratic Party.
The growth arrow’s trajectory is more uncertain. The Bank of Japan’s two per cent target consumer price inflation looks as out of range as ever, while real GDP growth has disappointed. The corporate reluctance to increase wages or spend their huge cash piles remains strong. Still, Abe can take satisfaction in modest corporate governance improvements, and some increase in female participation in the workforce.
The hard reality of demographics would make it wise for the next prime minister to choose a more attainable growth target. It is hard to imagine much expansion from a declining working age population, down by 0.5 per cent in the year to October 2019, with the under-15 group shrinking 1.3 per cent.
Abenomics may endure long after Abe, but so will Japan’s headaches.