KEY POINTS:
The moment Japanese Prime Minister Shinzo Abe resigned, pundits were out offering explanations. Weak diplomacy, scandals, verbal gaffes by Cabinet members, you name it. Yet Abe's undoing was the economy, period.
Abe's predecessor, Junichiro Koizumi, set the stage for important changes to what arguably had become the most complacent of the world's large economies. Fancying himself as Japan's answer to Margaret Thatcher, Koizumi sought to sell key government holdings such as Japan Post, to reduce wasteful spending and to get politicians' hands off the economy. After five years of taking on Japan Inc, Koizumi turned the task over to Abe in September 2006.
While Abe had many failings, his biggest was taking Japan's recovery for granted. A year later, deflation persists and the economy may be back in recession. But Japan is far healthier than it was six years ago. Banks have disposed of bad loans, companies are hiring again and the Bank of Japan ended its zero-interest-rate policy. Yet Japan is still performing well below potential.
The last straw for voters was a pension-fund scandal. Abe was unable to win back public trust after news the Government mismanaged 50 million pension records. To many voters, it was symptomatic of the ruling LDP's unsteady handling of the economy.
It was as if the Marx Brothers were in charge. Think about it. The key to making Japan's recovery self-reinforcing is getting households to spend more. And then the LDP has to admit it lost records of the money that millions of families would presumably be relying on to feel comfortable to consume more. Discouraged by declining wages, consumers became the most pessimistic in almost three years in August. While financial-market turmoil certainly didn't help, wages have fallen every month this year.
Consumption, which makes up more than 50 per cent of the economy, increased in the second quarter at less than half the pace of the previous three months. That's bad news as the outlook for exports dims during a global growth slowdown. Japan's gross domestic product shrank at a 1.2 per cent annual rate in the second quarter.
Granted, one leader can't be expected to achieve much in a US$4.5 trillion economy in a year. Abe's real failing was that he slowed the movement toward change that existed when he came to office. Rather than building on and accelerating Koizumi's initiatives, Abe allowed elements of Japan Inc to creep back in.
The return of cross shareholdings between companies and of poison pills to combat takeovers showed how a distracted Abe failed to mind the store. Abe also did little to tackle three pressing issues: raising productivity, reversing dismal demographic trends and competing with China. All three are related. The real challenge is to get current employees to produce more. That, along with increased innovation and entrepreneurship, is the only way high-cost Japan can maintain its standard of living as low-cost China rises.
Uncertainty is bad for markets, and it's an open question who will replace Abe. Many people are looking to Taro Aso, the LDP's current secretary-general. Japan's next leader will need to make a beeline for the economy. If not, the Marx Brothers will remain in charge and voters will show them the door.
* William Pesek is a Bloomberg News columnist. The opinions expressed are his own.
