For Japan’s Abe, Diplomacy Is Set to Trump Economics in 2017

  • Abenomics likely to get less attention, political capital
  • No major economic reforms expected in Japan in coming year

Shinzo Abe’s trip to Pearl Harbor later Monday, the first by a sitting Japanese prime minister in decades, presages a year filled with diplomatic and security challenges that are likely to keep economic reforms well down his list of priorities.
 
As 2017 begins, Abe faces an international landscape fraught with uncertainty after U.S. voters elected Donald Trump, who has questioned the security framework that has defined Asia since World War II. That poses a risk for Japan, which relies on U.S. military power to deter threats from North Korea’s nuclear program and China’s assertiveness over disputed territory.

The increased focus on geopolitics offers another reason to delay reforms long-promised under Abenomics, even as Abe enjoys high approval ratings and a recovering economy. Abe in the past has shown little inclination to spend political capital on painful changes, and next year promises more tinkering than overhauls on the economy.

"At least in the first half of 2017, foreign policy is going to be the priority," said Tobias Harris, vice president at Teneo Intelligence in Washington. "Step one is figuring out just where exactly the U.S.-Japan relationship is."

In an annual year-end speech last week in Tokyo -- one he has used in the past to outline economic plans -- Abe spent more than half an hour of the 55-minute address discussing his summit with Russian President Vladimir Putin. He barely mentioned the economy.

‘Could Be Messier’

Like leaders around the world, Abe is left waiting and wondering as Trump, who has already roiled U.S.-China relations over Taiwan, previews his foreign policy on Twitter.

Abe described Trump as "a leader we can trust" after a 90-minute meeting in November. But Japan will need clarity after Trump suggested the country may have to develop its own nuclear weapons, Harris said. A second priority will be determining if the Trump administration will stick to the Obama White House’s position on the dispute between Tokyo and Beijing over islands in the East China Sea.

"The East China Sea, I think, could be messier than it’s been in a few years, particularly in light of the broader shifts in U.S. China policy," Harris said.

Even before taking office, Trump has thrown a wrench in Abe’s plans. Trump promised to withdraw the U.S. from the Trans-Pacific Partnership trade agreement, a deal that Abe has championed at home. Abe’s party pushed TPP legislation through parliament earlier this month in an attempt to convince the U.S. Congress to do the same.

"The trade relationship between Japan and the U.S. could get significantly worse," said Hiromichi Shirakawa, chief economist at Credit Suisse Securities in Tokyo. He said the relationship could depend on whether or not Abe follows the new U.S. administration’s diplomatic postures toward Russia and China.

Stability at Home

After a year in which populist rage erupted around the world, Japanese policy makers are cautious. At home, Abe’s main goal for 2017 will be maintaining stability, said Tomohiko Taniguchi, a special adviser and speech writer for the prime minister. 

"Japan is entering tumultuous waters internationally," he said, citing the economic slowdown in China and political turmoil in Europe as other potential risks.

In the session starting in January, the Diet will likely pass a bill legislating equal pay for permanent and temporary workers doing the same jobs, according to Taniguchi, but the more liberalized labor market touted by economists and businesses as a key reform remains a distant goal.

"The hire-and-fire culture is not going to be with us for many years to come," he said.

The spring will also see debate over the possible abdication of the emperor, electoral district reform and the implementation of an unpopular bill that will legalize casino development. All of these will eat into parliament’s time and leave Abe with less political capital for structural reforms.

Jun Okumura, a former trade ministry official and now a visiting scholar at Meiji Institute of Global Affairs, doesn’t expect any bold moves on economic policy next year.

"Japan is in a comfortable place," Okumura said. "It’s in the Indian summer of postwar history. Abe doesn’t have to hit a home run."

International Voice 

With negligible immigration, Japan stands out as a democracy where policy makers are not fighting angry populism. That leaves Abe, long seen as a nationalist and traditionalist, among a dwindling number of voices for the existing liberal international order.

"Japan is running as a front-runner in the arena of globalization and internationalization," said Taniguchi, the adviser. "Abe feels responsible in standing tall and staying firm in advocating the value of a liberal international trading regime and rules-based order."

It’s an unfamiliar position for a country that has typically followed the U.S. lead on foreign policy, and an unexpected shift for Abe, who during his first stint as Japan’s prime minister governed more in the narrow style of a leader of an ideological faction.

Yet it’s consistent with Abe’s actions more recently, Harris said.

"To a certain extent I think Abe’s tried to do that for the last several years. He’s certainly tried to be that voice in Asia itself," he said.

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