The Return of Japan

TOKYO – “Japan is back!” Prime Minister Shinzo Abe declared during a visit to Washington, DC, earlier this year. But, while Japan may be on the right track after two decades of economic stagnation, there is still much to be done to secure the country’s long-term future.

In July, Abe’s Liberal Democratic Party (LDP) won control of both houses of parliament – a resounding electoral victory that amounts to the strongest political mandate any Japanese leader has received in many years. As a result, Abe seems likely to remain in power longer than his ineffectual predecessors, most of whom did not last more than a year.

Meanwhile, Japan’s economy seems to be recovering from a generation of malaise, with this year’s annualized growth rate exceeding 3%. Moreover, following the triple shock of the earthquake, tsunami, and nuclear catastrophe in 2011, Japan has managed (at considerable cost) to replace the 25% of its energy supply that the disabled reactors at the Fukushima Daiichi plant provided. The announcement that Tokyo will host the 2020 Olympic Games has also boosted public confidence.

Skeptics worry that the economic progress may not last, arguing that the high growth rate is simply a reflection of loose monetary policy and fiscal stimulus – a strategy that inflation will render unsustainable. Abe’s supporters reply that the third “arrow” of “Abenomics” – productivity-enhancing structural reforms – has only now been removed from its quiver. They point to Abe’s ability to overcome resistance from small rice farmers, part of the LDP’s electoral base, to Japan’s participation in negotiations on the Trans-Pacific Partnership, which would open Japan’s economy to increased global competition.