Asia Economy

Japan’s New Leader Dares to Challenge Old Order

Martin Fackler
Japanese Prime Minister Shinzo Abe.
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Just two months into office, Prime Minister Shinzo Abe is showing an increasing willingness to take on some pillars of Japan's establishment — the central bank and the country's politically influential farmers — in an aggressive attempt to finally breathe some new life into Japan's listless economy.

Mr. Abe has already forced the departure of the cautious head of the central Bank of Japan and nominated a replacement who vowed Monday to do "whatever it takes" to fight crippling deflation that has eroded profits and wages and stifled spending.

Mr. Abe is also expected to announce soon that his nation will join negotiations on an American-led Pacific free-trade pact that the Obama administration hopes will offset China's growing economic and political might, but that could also force Japan to make painful, market-opening changes it has resisted for nearly two decades.

Joining the pact risks alienating farmers, longtime staunch supporters of Mr. Abe's conservative Liberal Democratic Party, who would face more intense competition from cheaper imports.

But the broader public appears more willing to embrace drastic economic measures at a time when Japan, the region's waning economic superpower, feels threatened by China, helping push Mr. Abe's approval ratings to around 70 percent in recent polls. That is a vast improvement from his disastrous first term in office six years ago, and from concerns that his hawkish views might alienate him once again from voters.

"The future of Japan's economic growth depends on us having the willpower and the courage to sail without hesitation onto the rough seas of global competition," Mr. Abe declared in a speech to Parliament last Thursday.

Critics warn that his stimulus measures, including a new wave of public works projects, could increase Japan's already crushing public debt, or set off a currency war as the prospect of drastic easing by the central bank has caused the yen's value to plummet.

They also worry that Mr. Abe's effort to combat deflation could include radical steps that they warn could disturb global financial markets by unleashing a flood of Japanese money into developing economies, causing dangerous, speculative bubbles.

The many economists who support Mr. Abe's plans, however, have a different warning: that any economic benefits could prove short-lived unless they are accompanied by a longer-term growth strategy.

The trade pact, they say, will be a good litmus test of Mr. Abe's willingness to force such deeper structural changes in Japan. It could also force the country to face a long-debated and difficult decision: whether it is willing to trade some of the egalitarianism it takes such pride in to embrace a freer form of capitalism that could break the grip of vested interests and reverse a long decline.

"The T.P.P. is a battle over what kind of country we want Japan to be," said Hisaharu Ito, a top official in Aichi Prefecture's Union of Agricultural Cooperatives, referring to the trade agreement, the Trans-Pacific Partnership. His organization represents some 10,000 full-time farmers who fiercely oppose the trade group.

He added, "Do we want to turn into a harsh society of winners and losers, or remain a gentler society where benefits are shared?"

Japan's joining the trade group could have an added advantage for the United States, possibly opening some of Japan's still impenetrable markets to American products.

(Read More: Bank of Japan Seen on Hold as Shirakawa Gives Way to Bolder Leadership)

Here in Tahara, a city in central Aichi, where rice paddies and cabbage fields run up against a Lexus plant, Shigeaki Okamoto is the rare voice in the farming community pushing for change. He says Japanese farmers could compete without the tariffs they have been sheltered behind if they were allowed to become entrepreneurial.

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Mr. Okamoto tried to export rice to China, only to be told that a company controlled by a farm co-op has a monopoly on sales to that country. He says such restrictions are typical of government bureaucrats and farming co-op officials who have tried to block him every step of the way with arbitrary regulations and even attempts to ostracize him from others farmers.

"Japan is wrapped in an invisible web that prevents you from showing any sort of initiative," said Mr. Okamoto, 51.

Mr. Abe's promises of economic revival have already created a budding optimism in urban areas like Tokyo, where the stock market has rallied and restaurants seem more crowded than they were during years in which many people resigned themselves to Japan's fading prospects. The new, if fragile, hopefulness has been boosted by rising corporate profits, as a weakening yen has brought desperately needed relief to badly shaken electronics corporations and other exporters struggling to compete with Chinese and Korean rivals.

(Read More: Japan Central Bank Eyes QE-Style Balance Sheet Expansion)

The yen has dropped 20 percent in recent months, on the strength of Mr. Abe's promises to rethink Japan's priorities.

While the new prime minister is off to a strong start, political analysts said it was too early to tell if he will be the rare decisive Japanese leader who can make a real impact, like his mentor, former Prime Minister Junichiro Koizumi, whose liberalizing policies Mr. Abe is apparently seeking to continue.

Economists said the jury is still out on whether Mr. Abe's measures, popularly dubbed Abenomics, will be drastic enough to restore growth to a $5.9 trillion economy that in yen has shrunken back to the same size it was in the early 1990s and caused the country to slip behind China on the list of the world's largest economies. (The current ranking is the United States first, followed by China and Japan.)

Mr. Abe started his push for changes at the Bank of Japan less than a month after taking office in December, pressing its leaders to set a target of causing rising prices, or inflation, at a rate of 2 percent per year. When the bank failed to follow quickly with bold measures to accomplish that goal, Mr. Abe's Liberal Democrats threatened to rewrite the law to make the bank more obedient.

That was enough to drive the incumbent central bank governor, Masaaki Shirakawa, who has long been criticized for inaction, to announce that he will step down three weeks earlier than planned. On Thursday, Mr. Abe nominated his replacement, Haruhiko Kuroda, an Oxford-trained former Finance Ministry official.

Even Mr. Abe's own economic advisers say it is unclear what Mr. Kuroda will do, and point out that he is more cautious than other people whose names were floated as possible replacements for Mr. Shirakawa. Still, speaking at parliamentary hearings on his nomination on Monday, Mr. Kuroda pledged to do "whatever it takes to escape from deflation," without giving specifics.

Mr. Abe's advisers say they expect Mr. Kuroda to at least catch up with the more aggressive increase of the money supply adopted by the United States' Federal Reserve chairman, Ben S. Bernanke, since the 2008 financial crisis.

One adviser, Nobuyuki Nakahara, a former member of the Japanese bank's governing Policy Board, said Mr. Kuroda's most likely first steps would be to sharply increase purchases of corporate bonds and real-estate-linked securities.

Mr. Nakahara and others call it ironic that the Bank of Japan had fallen behind the Fed, given that the Japanese central bank a decade ago pioneered Mr. Bernanke's current strategy of flooding the economy with money, known as quantitative easing.

There have been calls for the Japanese bank to once again break new ground by taking more unprecedented steps, such as buying foreign bonds or unlimited numbers of newly issued Japanese treasuries, which would essentially hand a blank check to the Japanese government.

Many Japanese voters seem to agree that bolder steps are needed as anxiety grows over Japan's geopolitical standing versus China's.

"People here realize that economic revival is tied to Japan's security," said Robert Feldman, an economist in Tokyo at Morgan Stanley MUFG Securities.