The task facing Japan's new prime minister

Updated English original of column published on September 29 by Mainichi Shimbun in Japan

In Europe, we are better at producing reports recommending what needs to be done than at producing political leaders capable of doing it. On Sept. 9, one of Europe's most respected statesmen, Mario Draghi, a former president of the European Central Bank and former prime minister of Italy, produced a huge study of Europe's economic weaknesses and how to remedy them, which promises just to gather dust on the shelves as neither Germany nor France nor any other major European Union country has a government strong enough to act on it.

Japan is also in the habit of forming committees to produce recommendations few of which are implemented. A prime example was Prime Minister Fumio Kishida's Council on New Form of Capitalism Realization, which was set up shortly after he took office in 2021. It would be unfair to say that this council achieved nothing during its three years of operation, but few if any ordinary citizens would say that Japan now has a "new form of capitalism" nor even that it is moving noticeably toward one.

That lack of noticeable change is a big reason why the public approval ratings of Prime Minister Kishida and his government hit record lows, and why he was forced to recognise that he should not run for re-election as leader of the Liberal Democratic Party on Sept. 27. Nonetheless, while Japan shares our European habit of producing fine but un-implemented recommendations it is at least changing its leader. This makes it a good moment to ask what the newly elected president of the Liberal Democratic Party, Shigeru Ishiba, who is to become the new prime minister, might be able to do.

Normally the cynical but well-justified answer is: not much. Faces may change but the political party and the system it inhabits does not. This time, however, there look to be three reasons why the cynical expectation that continuity will beat change might turn out to be misplaced.

The first reason can be counted as the ingredient that all political leaders need: luck. After more than two years during which the economic winds have been unfavourable to Japan and especially to ordinary Japanese, we may be entering a phase in which the winds prove warmer and more helpful. The unfavourable 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 Mr Ishiba’s immediate decision to call a general election for the powerful Lower House of the Diet (parliament) on October 27th could prove a good one. Mr Ishiba has anyway long been popular with voters because 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 neutralised by 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 favour.

That produces the second reason why some change might occur, which is that if the LDP wants to do well at 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 this 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 realise 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 labour 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 round and replace it with a positive one. Simple steps such as the abolition of tax rules that penalise married women from earning more than a limited income can offer an easy beginning. A harder step, because it is opposed by labour 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 are easily able to change jobs mid-career and exploit the labour 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 labour strategy with a high-wage one, then tax revenues will rise, making it easier to finance the defence 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 Mr 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.