Welcome Back, Japan Inc.

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The New York Sun

Barring a miracle, Shinzo Abe will be anointed as Japan’s next prime minister on September 20.

The 51-year-old, who serves as chief cabinet secretary, is Junichiro Koizumi’s hand-picked successor. Polls show most Japanese agree with Mr. Koizumi’s instincts, figuring Mr. Abe is the best person to shepherd the world’s number two economy from stagnation to growth for good.

There’s little doubt Japan’s economy is better off today than it was in April 2001, when Mr. Koizumi took over. While we can debate who gets credit for its revival — China’s growth and private-sector restructuring gets the bulk of it — Japan is growing again, deflation is being defeated and incomes are rising.

Mr. Abe, some say, will offer more of the same. Yet what Japan really needs is an economics wonk who will get under the hood of Asia’s one-time engine and give it a tune-up. Mr. Koizumi is a macro guy and his “reform without sacred cows” always was a broad blueprint for how Japan needs to change. Now, a micro guy must tend to the nitty-gritty.

Change has indeed occurred. Banks repaired their balance sheets, companies are less bloated and more competitive, and the government is making it easier to start new businesses.

The pro-market Koizumi era has strategists, such as Masahiro Fukuhara of Barclays Global Investors in Tokyo, predicting Japan’s markets “could really surprise investors in the next few years.”

Mr. Koizumi’s drive for change has only just begun. Remember, too, that the old guard of the ruling Liberal Democratic Party watered down Koizumi’s plans in areas like health care, pensions, and highway planning. And Mr. Koizumi’s efforts to privatize Japan Post won’t be completed until 2017.

There also are concerns the LDP is itching to roll back some of Mr. Koizumi’s initiatives, including getting Japan Post out of the hands of politicians. The LDP has long used the trillions of dollars sitting in the postal savings system as a piggy bank to fund their pet projects. If Mr. Abe needs to fight to save Mr. Koizumi’s changes, he may be distracted from planning for the future.

That’s a worry when the most contentious issues such as cutting debt, reducing the government’s role in the economy, boosting the birthrate, shoring up the national pension system, utilizing the female workforce, and bringing this recovery to the next level will fall on Mr. Abe’s lap.

That would be fine if Mr. Abe were a get-under-the-hood kind of politician. Now that the biggest cheerleader for change, Mr. Koizumi, is stepping down, will there be political will to accelerate things? Heizo Takenaka, a Koizumi adviser and key reformer, said last week he will resign from his parliamentary seat.

Mr. Abe’s focus isn’t really on the economy. It’s mostly on revising Japan’s American-written constitution for the first time since its adoption in 1947 to remove the ban on possessing a military.

Sixty-one years after World War II, Japan should indeed alter its constitution. Fears of a return of Japanese militarism are belied by six decades of pacifism. Besides, Mr. Koizumi already blew off Japan’s constitution by sending troops to Iraq. And Japan has one of the world’s most advanced defense forces.

Mr. Abe has more immediate issues on which he needs to focus. One is digging Japan out of isolation. Thanks to Mr. Koizumi’s visits to the Yasukuni Shrine, where 14 convicted war criminals are honored among the dead, Asia’s threebiggest economies — China, Japan, and South Korea — are barely speaking.

Another problem is Mr. Abe’s fuzzy platform. He has brushed broad stokes, though filled in few details. One of Mr. Abe’s opponents in the September 20 election, Finance Minister Sadakazu Tanigaki, wants to reduce Japan’s massive public debt. The absence of such a push from Mr. Abe should concern investors, given that Japan has a lower credit rating than Botswana.

There also are worrying signs that Japan Inc. is making a comeback. One is how the Japanese establishment circled the wagons to halt recent hostile takeover attempts. It has prompted a renewal of the practice of companies buying each other’s shares as a protective measure.

Over the past 12 months, cross shareholdings have been increasing, according to Jesper Koll, chief Japan economist for Merrill Lynch & Co. “It’s the corporate culture. Why are we getting Abe after Koizumi? It’s back to the old ways. You’re going back toward more cross shareholdings and lifetime employment at a blue-chip company.”

Mr. Abe’s views on the Bank of Japan seem dubious, too. The jury is still out on the wisdom of the BOJ’s quarter-point rate increase in July. Yet Mr. Abe is already falling into old LDP thinking on the BOJ.

Loose BOJ policies have long been the norm. Rather than modernize the economy, politicians pushed the central bank to print yen. Once the BOJ moved interest rates to zero, politicians still said it wasn’t doing enough to support economic growth.

Mr. Abe is already calling on the BOJ to keep borrowing costs low. Japan would be better off boosting productivity in an economy that’s ripe for greater efficiency. There’s much back-slapping in Tokyo now that companies are hiring again. Lost in the euphoria are serious plans to squeeze more output out of those already working.

Yes, Japan is back.That doesn’t mean it will grow faster than 1 or 2% on a consistent basis. To do that, the next leader must shake things up more than Mr. Koizumi did. It’s far from clear Mr. Abe is that man.

Mr. Pesek is a columnist for Bloomberg News.

The New York Sun

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