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In East Asia, where Confucianism is still deeply rooted in people’s minds,
golden mean is considered a supreme virtue and extremist views, falling outside
the regular norm, are disapproved.
Shinzo Abe, whose Liberal Democratic Party (LDP) regained control of the
Japanese Parliament after a landslide victory in the latest election, is likely
to follow this “policy of balance” on political matters, after he is officially
appointed as the new prime minister of Japan.
While it is too early to make any judgments, everything so far indicates that
the incumbent Prime Minister’s administration will be persistent in their battle
to stop a continuing deflation and a depreciation of the yen.
What the political victory means?
While it is too early to make any judgments, everything so far indicates that
his administration will be persistent in their battle to stop a continuing
deflation and a depreciation of the yen. Looking at Abe’s remarks during the
election campaign, the LDP, with its well-balanced and structured policies,
fulfils the necessary requirements to address economic challenges effectively.
Part of Abe’s policy of balance includes, for instance, setting an inflation
target of two percent in monetary policy and focussing on industrial and trade
policies as a growth strategy rather than traditional macroeconomic policy.
Even though it is difficult to tell what the details of Abe’s administration’s
policy on balance will be, I would like to outline my thoughts on how it could
look like given the current economic conditions.
Towards long-term growth
Today, inflation has led to a significant drop in national bond prices and a
government debt increase, because of rising interest payments for national
bonds. Attempting to boost the economy through expansionary monetary policy is,
therefore, a risk, which should not be taken lightly. Apart from this risk,
Japan is suffering severely from cumulative debt, and fiscal policy is all tied
up by budget constraints.
Therefore, a feasible and realistic policy to put the economy on the growth
track should come at no cost for Japan. As such, deregulation can be seen as a
key policy measure, as it can stimulate private business ventures without
straining the household budget. The Japanese service sector in particular
suffers from low productivity in comparison to other developed nations, and this
is mainly due to excessive regulation. Deregulation within the service sector,
including the healthcare and environmental services, would expand business
opportunities and encourage new entries, raising the overall productivity level
by increased competition.
Japan’s long-lasting deflation is, on the whole, caused by insufficient demand
rather than low price levels. Therefore, the most effective countermeasures to
battle deflation would need to target demand and not price levels; and total
effective demand itself can be stimulated by either creating new business
opportunities or offering new products through, as mentioned, deregulation.
An even more direct measure than deregulation would be to implement an
industrial policy, which encourages private firms to produce new and
high-value-added products and thereby, stimulate demand.
Aging and depopulation are further causes for the stagnant consumption. On top,
elderly people in Japan refrain from consumption in order to create a financial
cushion for a seemingly uncertain future. The best solutions to stimulate and
raise Japan’s consumption are, therefore, to attract more immigration from Asia
and other countries, and to encourage more women and elderly people to join the
Japanese labour market. These additional consumers would not only increase
domestic consumption drastically, but will also have positive spill-over effects
on the companies’ businesses itself.
Japan today, with its demand reaching a saturation point, needs a diverse labour
force, because diversity in labour groups generates productivity, creativity and
innovation through a synergy effect. To achieve this increase in immigration, it
is essential to promote free trade and investment policy, since it contributes
to a more open Japanese market and as a consequence leads to a rising number of
immigrants. In fact, free trade and investment would have another positive
effect on the economy: the competitiveness of domestic industries would be
spurred when foreign firms and products enter the Japanese market.
Pursuing to conclude as many FTAs as possible, such as the TPP (Transpacific
Partnership), Japan-EU FTA and RCEP (Regional Comprehensive Economic
Partnership), is, therefore, ideally suited to reform the Japanese industries
structurally and to revitalise the economy fundamentally.
This mix of industrial and trade policies, along with an inflation targeting
policy, could be crucial to mark an end to the stagnant economy – if the new
administration decides to pursue it. Even though this is a well-balanced
approach towards achieving a golden mean, other challenges, such as an expanding
income inequality and more social equity, remain unanswered.
Achieving balance in foreign policy
The new government is likely to pursue its policy of balance in foreign policy;
that is, a balanced US-Japan partnership as well as Japan-Asia cooperation.
While trying to restore and reconsolidate the US-Japan economic and security
alliance, which has been somewhat eroded by the DPJ’s US-foreign policy of
decreasing security-dependence, the new government will probably handle the
territorial disputes with China and South Korea with utmost care to avoid
political conflicts and put economic relations at risk. These two countries are
crucial trading and investment partners for Japan and further conflicts around
the territorial disputes could harm the Japanese economy to a more serious
extent.
It is crucial for Japan and the new government to utilise existing multilateral
or regional forums, such as UN, WTO, APEC or RCEP, as communication channels to
reach out to China and impel it to observe international rules and guidelines,
whenever it attempts aggressive or self-assertive foreign policies. India plays
an important role in establishing such kind of international community that
advocates the observation of international rules.
If the new Japanese administration is successful in realising the
above-mentioned economic and foreign policies, a significant positive impact on
the Japanese economy, the world economy, and particularly the Asian economies
can be expected. It would also mean the recovery of the global economy after the
financial crisis in 2008 and the recent Euro crisis.
Japan is losing its superpower status of the 70’s and 80’s and is gradually
turning into a middle-power state like the UK or France in the EU. If the new
policies work well, Japan would be able to maintain its status as a respectable
middle-power state and thereby, in association with global leadership, can take
the initiative in ensuring that international rules are not violated by any
state, including China.
The policy of golden mean is certain to bring results in multiple ways – soon.
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