The failure of Shinzo Abe's economic policies will leave a frightening vacuum in north Asia, says ANDREW THOMSON.
BUTTER all but vanished from the shelves of my local supermarket in the month before Prime Minister Shinzo Abe called the early election in November. This is the election that the international media reported Abe won in a landslide, the same one in which his party lost a seat and the Japanese Communist Party enjoyed the biggest increase in Diet representation.
What is going on here? Isn't Abenomics a roaring success? Not when the yen gets cheaper every month. Japan's dairy farmers are abandoning milk production because the cheap yen means imported fodder for their dairy cows has become unaffordable.
In the fishing port where I live outside Fukuoka in southern Japan, most of the trawlers never leave the harbour. Imported diesel fuel is so expensive that the fishermen can't break even.
As Australians with a compelling interest in Japan's economic and security well-being we would be foolish to ignore these danger signs.
Abenomics was always a huge gamble, and these days it's looking like a losing bet, a cheapened currency with no economic reform is a recipe for disaster.
After winning the general election in late 2012, Shinzo Abe embarked on a policy of reflation. The Bank of Japan started printing money at a furious rate, buying Abe's government bonds on an unprecedented scale. This monetising of government debt is way above what the Federal Reserve is doing in the United States. The Japanese sharemarket doubled, the value of the yen fell heavily and continues to do so. Consumer confidence initially revived, but soon fell back into negative territory as Abe raised the consumption tax in a half-serious effort to restore budget discipline.
“Abe demands reform of Japan Agriculture, the prehistoric national farmers co-operative that controls agriculture”
Abe then embarked on the next stage of his great gamble - he demanded sweeping economic and structural reform. Oh dear, groaned his party, the collection of tribal self-interest groups known as the Liberal Democratic Party (LDP) that has governed for much of the post-World War II period.
Abe insisted Japan join the Trans-Pacific Partnership. The result? Paralysis, as the LDP stubbornly refuses to agree to modest cuts in agricultural tariffs and to open the food market to mild competition.
Abe demands reform of Japan Agriculture or JA, the prehistoric national farmers co-operative that controls agriculture by legal fiat. In Japan a company cannot own agricultural land, nor own more than 50 per cent of an agricultural enterprise.
Structural reform then morphed into a baffling series of special economic zones and regional tax preferences. Deep down Japan still harbours a profound distaste for entrepreneurial enterprise. The truth is that the country's ageing population crisis stymied reform. The older Japan gets, the more people resist change. This is where Abenomics gets really dangerous.
By having the Bank of Japan monetise government debt at such extraordinary levels Abe is bloating the country's financial system with surplus liquidity. Certainly, Japan's deflation is a stubborn problem, but if there is no far-reaching reform of Japan's economic system with its monopolies, its protectionism, and its bureaucratic control of business, then there is little capacity to use that surplus liquidity for productive purposes. The risks are there - a collapse in the yen's value to perhaps ¥200 per US dollar and crippling inflation.
“Australia faces graver risks than a falling iron ore price”
Japan's government debt burden is astonishingly heavy. Total government debt at all levels is about 245 per cent of gross national product. About 40 per cent of all tax revenues is spent paying interest on this debt, and that's at an interest rate of about 0.5 per cent on the bonds. If the Bank of Japan stopped buying Abe's bonds the interest rate would be about 2 per cent, and the Japanese government would have no funds to pay the interest. Officials admit that sovereign default is a real possibility. It's happened twice before.
Ask yourself, what are the security consequences for Australia of a financially crippled Japan and the vacuum in north Asia? How will Beijing take advantage of such an opportunity? Will Japan's democracy survive intact? In the 1930s the US ambassador to Japan, Joseph Grew, recorded in his diary threats by radical military officers to reimpose a shogunate and do away with the cabinet. In the end they took over the cabinet. Such notions may seem absurd these days. But would the US risk everything in a war with China to protect a Japan that foolishly refused to reform its economy and went bust?
This should give us pause. Given the reckless mathematics of Abenomics and the impossibility of reform in Japan we had better acknowledge that Australia faces graver risks than a falling iron ore price. Ask Moody's what they think of the policies of our second-largest trading partner.
Andrew Thomson served as member for Wentworth and as minister for sport, tourism, and the Sydney 2000 Games in the Howard government. He lives in Fukuoka, Japan, where he practices law.
