Abe Will Need All His Zen Calm to Press on With Abenomics

  • Economists call for a freer labor market to bolster economy
  • Abe officially starts second three-year term as party leader

After his first stint as prime minister ended in frustration and broken health in 2007, Shinzo Abe headed to a Buddhist temple and learned Zen meditation. As he prepares for three more years battling to reform Japan’s faltering economy, he’s going to need it.

The chaos in the legislature and public demonstrations that accompanied last week’s passage of his bills to expand the role of the military may be only a taste of what’s to follow for Abe as he turns his attention to an economy that has shown limited response to his efforts at revival. The changes needed to make the world’s third-biggest economy competitive again may face even bigger roadblocks.

“First of all, labor reform,” said Robert Feldman, chief economist at Morgan Stanley MUFG Securities in Tokyo. “We have a lot of talented people in the wrong jobs at the wrong wages. The reason for that is that we have labor laws that discourage labor mobility.”

While he has promised to drill away the bedrock of regulation hampering economic growth, in the labor market Abe has so far succeeded only in tweaking rules on temporary work. A bill introducing merit-based pay for higher-income white collar employees failed to pass amid labor-union fears that it would be extended to cover more of the population. Instead, the government has been distracted by months of ruckus over the defense bills.

“Reforms in these areas are considerably slower than people had expected,” said Hiromichi Shirakawa, chief Japan economist at Credit Suisse Group AG in Tokyo, who used to work at the Bank of Japan. “It’s disappointing.”

Debt Burden

If Abe squanders the chance to make the structural changes, Japan’s economic growth may not be strong enough to relieve the world’s largest debt burden, eventually triggering a surge in borrowing costs.

What’s needed is to create flexibility in the labor market by making it easier for companies to fire mid-career workers in return for severance payments, said Martin Schulz, senior economist at Fujitsu Research Institute in Tokyo. He’s not holding his breath.

“This is the hardest thing to do,” Schulz said. “It’s very difficult to touch people’s contracts mid-career.” Abe may be reluctant to erode the tradition of lifetime employment as his support rates hover around record lows.

A more efficient labor market would help persuade firms to use their record cash reserves, another key priority of Abe’s administration, by giving them access to skills at a reasonable price, Feldman said. So far, Abe’s bid to pressure companies to invest and pay more in salaries has borne little fruit.
Schulz says it is more realistic to hope Abe delivers a trade deal with the European Union that has been pending for months, and takes more steps to free up the energy market, which would lower costs for consumers and businesses.

Abe may opt to steer clear of difficult issues in a speech Thursday after his official appointment to a second three-year term as Liberal Democratic Party leader.

He will set a target of expanding the economy to 600 trillion yen ($5 trillion), public broadcaster NHK said, compared with the current nominal gross domestic product of 500 trillion yen. Rather than focus on deregulation, Abe will set out new policy priorities of bolstering support for families with children and those who care for elderly relatives, NHK said.

Abe’s initial economic achievements -- drastic monetary easing that caused the yen to drop, boosting stocks and profits at the big exporters -- are in danger of being lost without structural reforms. The Topix index rose more than 50 percent in 2013, 9 percent last year, and this year is up less than 5 percent. The economy contracted last quarter and export growth slowed for a second month in August.

1,000 Days

Yet Abe, who celebrated both his 61st birthday and 1,000th day in office this week, is far less vulnerable to political pressure as he begins a second three-year term as LDP leader.

Whether he credits the calm of the temple, a new drug for his digestive disorder, or the disarray of the main opposition Democratic Party of Japan, he was re-selected unopposed as party leader this month, setting him on course to become the longest-serving prime minister since the 1970s. He has weathered storms over his defense policy, bolstered ties with the U.S., and steered through the worst crisis in China relations in decades.

“In the time he was out of office, he must have felt very frustrated,” said Hiroyuki Arai, an opposition lawmaker who has known Abe since both were political secretaries more than 20 years ago. “The Japanese people were very critical of him. He was humiliated, he had lost his honor. In that period, he studied very hard. He made a new plan of action.”

After Abe’s career hit the skids in 2007, he took up monthly visits to a Tokyo temple. Clad in the dark blue garb of a monk, he would sit cross-legged and meditate alongside fellow LDP lawmaker Yuji Yamamoto. He was last reported to have visited in July, just after his controversial defense bills passed parliament’s lower house.

“The effect of Zen meditation is to give you a calm mind,” said Yamamoto, who first invited Abe along to the Zenshoan temple and remains a Zen buddy. “It builds a person who can withstand shocks. I think he believes that, otherwise he wouldn’t go.”

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