Abe's "third reich": challenges abound
Signs of autumn in Tokyo: first day below 20C since spring and beer cans printed with autumn leaves to promote seasonal sales. Some shops have been selling Halloween paraphernalia already long, some have added even Christmas decorations by now. No yellow leaves for real. Instead, one more typhoon – No.24 this season – came from south to torment us on Sunday and on Monday Tokyo thermometers showed 30C again.
It's time for an update for the latest in politics and economy.
As expected, Abe-san was re-elected to lead LDP and Japan for another 3 years with strong support from party leaders, but not from the party ranks across the nation – as also expected. Whole 45% of regional party members gave their votes instead to Ishiba, his only competitor. Hate to even think that this country side favorite could have become Japan PM: he would not last 3 minutes with Trump and other world leaders. Yet, the entire population seems as divided about Abe as before: the polls show he is as much opposed as supported: 42% vs 39% according one survey.
We'll see what PM will get done during his "third reign". Will it be continued economic reforms or will he focus more to push the Constitution change? Can he do both or will he waste his newly reconfirmed power on his pet project that remains highly divisive among voters? Many analysts think there's no need to hurry any change in Constitution for the time being as Japan seems to manage a more active defense policy pretty well with today's interpretations of the current law. Yet, my bet is that Abe-san wants to leave his mark in history records and the long coveted change to 1946 Constitution would be more lasting than the fickle economy.
ECONOMY LOOKS GOOD
Forgetting economy would be a pity as PM has now a good starting point: all data is strong today and the outlook is very optimistic. The stock market hit its highest point last Friday since 1991 and the final figure for April-June GDP growth was corrected to 2.9% with business investment taking now the driver's seat. Morgan Stanley says this often overlooked component will grow average 7% next 3 years as all companies want to invest now in automation and robotics to overcome labor shortage, their biggest business obstacle according surveys. Yet, it is clear labor shortage will show day by day more in higher wages and boost consumer spending.
Exports continue to grow up nicely, too. Not that much to USA as feared but to China and Europe. The goods trade balance remain negative due to rising energy import costs, but thanks to Japan's big business abroad the financial balance continues highly positive for third year in row. Inflation remains below BOJ's 2% target but average land price edged up last year for the first time in 26 years. It was again mostly due to gains in big cities and prices still continue to go down in countryside, but this time it was not only Tokyo, Osaka and Nagoya, but also Sapporo, Sendai, Hiroshima and Fukuoka. New hotels and shopping centers keep rising all over, partly thanks to the growing volume of tourists spreading now all over the country beyond the traditional Tokyo-Kyoto route. In fact, the steepest land price rise was again in Niseko, Hokkaido, the fabled ski resort with "world's best snow" that has now managed to sell itself as popular summer destination, too, with wild nature, trekking, canoeing and river rafting. Rich Chinese investors are now buying luxury villas there to join earlier established Westerners, especially Australians.
The financial damage from recent natural disasters will make its own dent into calculations. Insurance payments to individual customers alone for June earthquake in Osaka area went up to JPY 87 billion, more than for the great Kobe earthquake in 1995, yet little compared to JPY 1.28 trillion insurance companies paid for the great East Japan quake and tsunami 2011 or even to JPY 382 billion for the big Kumamoto quake in 2016. No figures yet from recent Hokkaido quake and the Osaka typhoon just before it, but government has already pledged to assist the stricken regions with up to JPY 1 trillion to help rebuild the damaged infrastructure. A multitrillion public fund was set up for this purpose years ago and there's still plenty money left to go before taxes have to be increased to cover compensations. All this money, public and private, will keep construction companies and house builders busy for long time.
DOWNWARD RISKS AND DEMOGRAPHICS
Going forward, the main downward risks to economy remain sudden recession from sales tax rise next year, further rise in energy prices from increasing commotion in Middle East and US trade war threats. It's not only what Trump says to Japan, but what he does to China: many of the electronic gadgets shipped from China to USA - no matter if no matter if Apple or Huawei or Sony - are based on Japanese parts. If exports from China will be impacted by Trump's tariffs, so will Japan's exports to China. China-based producers are now looking into shifting their factories elsewhere - not that difficult for Japanese companies who have long had "China plus one" investment policy to counter the country risk.
On long term, the biggest challenge for Japan remains demography. One in five here is now over 70 year old and the share of 65 year old's is already 28%. If nothing is done, it will be 40% by 2065, something naturally unbearable for maintaining current level of social welfare. We all know that the remedy to this will be increasing migration however difficult it seems for many Japanese to accept. The sooner we start moving, the better. The new immigration law under making to allow up to 1 million migrant workers, what ever initial caveats it carries, is a fresh step again into right direction.
TRADE DEALS HERE AND THERE
Abe No.3's first foreign policy test last week in Washington did not go well: contrary to government pledges in advance, Japan had to accept to start talks with USA for a bilateral trade pact. Trump keeps insisting that the prevailing trade gap should be covered by increasing sales of US cars, beef and potatoes here and threatens to impose 25% tariff on Japanese cars and car parts exports if this does not somehow happen. Japan accepted to start talks in return for US promise it will not to impose tariffs as long as the talks last. Pure Trump blackmail again in other words and the US name "FFR" - for free, fair and reciprocal – is highly ironic not only in this sense, but even in its own content: targeting reciprocity means it is not free and fair. For me, it sounds like the centrally managed barter trade that Finland used to have with Soviet Union and the letters smack me as bad as "YYA" - the Finnish abbreviation for "friendship, co-operation and mutual assistance" – the political pact that we had to have with our buyer.
Japan's plan is to hand US same agricultural tariffs as it would have had with the TPP deal – they will be now just on bilateral basis that Trump loves so he can show HE won them by himself. To balance US pressure, Japan now has the TPP with Pacific neighbors and the EPA with EU and it will put new speed to RCEP talks with China to bring them to early conclusion, something Abe pledged in his speech at UN General Assembly. One step in this new approach to China will be his first official visit to China end this month. The "friend" in White House sure helps all other countries to become better friends with each other.
Abe-san badly needs now to shine out as winner, too. Following his humbling in Washington, he had another setback on Sunday in Okinawa governor election where government's strongly supported candidate lost again to an anti-base champion supported by opposition parties. This will put new obstacles to ongoing building of new US base in less populated north of the main island to take over from Futenma, the highly unpopular, accident-prone US helicopter field next to capital Naha. The new "haafu" governor, whose runaway father was from American military, vows to follow his predecessor's strict policy against any new base in Okinawa. Political fighting in the island prefecture will rise to a new level.
RUGBY WORLD CUP 2019
In sports, it's two years to Olympics, but just one to Rugby World Cup 2019, a much bigger global sport event than what non-rugby followers understand. Played over six weeks between 20 participating countries at 12 stadiums across the country and with 400,000 fans from around the world expected to come here, 2.5 million tickets have been selling out better than to Soccer World Cup last summer in Russia. For me, Rugby 2019 looks like repeat of the Soccer World Cup 2002 that Japan shared with Korea: a great feast of sports, international friendship and good times are expected!
Among the stadiums one special story stands out: Kamaishi town in Iwate, one of the worst destroyed in the 2011 tsunami. Along with the town, down went the local rugby stadium, home for one of the oldest teams here started by the big local steel mill. The town's 7 year resurrection from its utter destruction is now crowned by the brand new rugby stadium, proudly built by local volunteers and voluntary finance from local forest wood. Its 16,000 capacity does not stand in size against 70,000 at Yokohama International where the final will be played like in 2002 Soccer, but it makes a compelling story of the meaning of sports in this country's social and economic recovery from that nightmare.
Tokyo, October 2, 2018
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The columnist is a Japan veteran among Finnish business, our Chamber ex-president and today Member of the Board of Trustees.
After running a major Finnish industry company's Japan business for over 20 years, he is now Senior Associate in a strategic consulting company.