LDP elects a new head of government

Like Germany, Japan is facing historical tasks such as decarbonisation, i.e. the carbon-free economy, digitalisation, structural reforms and debt. Only the reform backlog is even bigger, the national debt with an estimated 270 percent of the gross domestic product (GDP) enormous.

But with Kishida’s election, foreign investors in particular seem to have lost hope of radical reforms. Because, as it can be summed up, the LDP elected the candidate for “ keep it up ” instead of its rival in the second ballot, the popular reformer and nuclear opponent Taro Kono. The gentle-speaking Kishida comes from a political dynasty and was Japan’s longest-serving foreign minister. For a long time he was considered the preferred candidate of the party establishment.

With Kono, there would have been a chance for business-friendly reforms, says Jesper Koll, a Tokyo-based economist and investment fund advisor. “But Kishida stands for stability, for someone who doesn’t cause trouble, and above all for doing what the technocrats of the elite tell him to do.”

Japan will not curb its indebtedness

Japan’s debt should continue to rise sharply under Kishida. According to an estimate by economist Sayuri Shirai, a former member of the central bank’s monetary policy committee, the debt ratio has skyrocketed by 20 percentage points as a result of the massive corona aid. Because in his short inaugural speech, Kishida indicated that he will actually move in the well-known channels of the LDP, which has governed since 1955 with two brief interruptions.

Economic stimulus programs have always been more important in the LDP than thrift and drastic reforms, as the debt level shows. Kishida is no exception. The first thing he wanted to do this year was an economic stimulus program worth several hundred billion euros to counter the effects of the corona crisis, Kishida promised on Wednesday.

Then he wants to tackle his list of priorities with which he had advertised himself. Right at the top is a “new capitalism”: Kishida wants to continue the “Abenomics” of high government spending, massive cash glut and bond purchases by the central bank, which had shaped his predecessor Shinzo Abe in 2012, albeit with a new twist.

Kishida promises a redistribution in favor of the poorer Japanese and in favor of the rural regions, which are suffering severely from population decline due to rural exodus and aging. “In terms of economic policy, this means that Kishida will focus less on monetary policy and more on fiscal policy,” says Martin Schulz, chief economist at the technology group Fujitsu.

The central bank expert Shirai estimates that such expenditures could work on credit for at least ten years. Because Japan not only benefits from the high transfers from its strong export economy. Above all, the central bank is stabilizing the growing debt tower. Around half of Japanese government bonds are already in the Bank of Japan’s custody accounts.

The only question that arises is whether Kishida will use the money to solve Japan’s basic problem, the low growth potential. “For wages to rise, companies would have to become more profitable. And in order to increase the productivity of the country and companies, climate and energy policy as well as digitization should actually be on top, ”says economist Schulz. But these are not the priorities in Kishida’s program.

Climate and energy policy: The opportunities for nuclear power are increasing

The new government’s energy policy could have far-reaching consequences worldwide. The global climate protection conference COP26 begins in the UK at the end of October. For years, Japan was seen as a brake on reducing emissions. It was only a year ago when the outgoing Prime Minister Suga decreed that the export nation should operate in a climate-neutral manner by 2050. However, in contrast to Germany, the country is still looking for a clear path to this goal.

Therefore, after the change of government, Japan must be careful not to be left behind in global climate policy, warns economist Shirai. “If the government doesn’t really support the zero-carbon policy, we could lose our competitiveness in green technologies.”

As an export nation and one of the leading manufacturers of cars, construction machinery, ships, robots and production systems, a technological lag would be fatal for Japan’s prosperity. Toyota CEO Akio Toyoda had already warned this year that Japan’s heavy reliance on coal-fired electricity could endanger the industrial site. “But Japan has extremely high deficits in the energy transition because the government has so far hardly focused on renewable energies,” says Schulz, an economist.

This trend could continue under Kishida. He wants to pursue Suga’s emissions targets. But he has clearly campaigned for a revival of nuclear power, which has only led a shadowy existence since the nuclear disaster of 2011.

Up until the meltdown in Fukushima around ten years ago, Japan had relied on a massive expansion of nuclear power in order to reduce carbon dioxide emissions. But while Germany had quickly decided to phase out nuclear power after the distant reactor catastrophe, Abe’s government stuck to nuclear power against the silent but tenacious resistance of a majority of the population.

Japan’s energy strategy appears to be unsustainable to this day. Renewable energies are promoted, but only half-heartedly. Environment Minister Shinjiro Koizumi and Kono as Minister for Administrative Reform have doubled the proportion of solar, wind and water power targeted for 2030, to 36 to 38 percent, in the current energy strategy. But the share of nuclear power is to remain fixed at 20 to 22 percent for 2030.

The problem: For this, Japan would have to switch on almost all 30 of the original 54 reactors. Only nine are back online, the fate of the others is uncertain. In order to generate the planned amount of nuclear power in the long term, Japan would even have to build new reactors soon.

Given the strength of the resistance, Japan has so far run the risk of wasting money and bureaucratic effort on a controversial technology. Climate activists and companies with green technology had therefore hoped for Kono’s election victory.

Digitization and deregulation go hand in hand

Another important field is the digitization of administration and business. In terms of technical aspects such as fixed and mobile broadband internet and smartphone presence, Japan is doing well. But the country lags far behind in everyday life.

In the ranking of the digital competitiveness of the Swiss Institute for Management Development (IMD), the country was even nine places behind Germany in 27th place in 2020, and the trend is falling.

In terms of online services, Japan has so far been the last in the OECD, an organization of old industrialized nations. In factories too, people have often worked very analogously with fax machines and name stamps – and teleworking was hardly used until the Corona outbreak.

But with the pandemic, that backlog became a real problem. The outgoing Prime Minister Suga therefore made a digitization offensive a pillar of his reform policy in the declared hope of increasing Japan’s productivity. Kishida’s rival Kono therefore founded a digitization agency that is supposed to become a kind of super agency to promote the state into the online world. But it can only be as good as the strategy.

And Kishida mainly talks about digitization of the financial sector and little about far-reaching structural reforms. It remains to be seen whether that will be enough to bring Japan back to the top of the world.

Japan’s fear of the rotating leadership

Japan can live with Kishida despite disappointed reform hopes. After all, over the decades with its strong administration, the country has perfected the art of creating a stable policy and gradual reforms, even with the LDP and thus government heads, which often rotate annually. For the major turning points, however, strong politicians were necessary.

Is that what Kishida is like? So far he has been considered more sociable for the establishment than the slightly quick-tempered Kono. Kishida is “very stable, friendly, never raises his hand or his voice,” explains LDP politician Yoshimasa Hayashi, who helped design Kishida’s election campaign.

In addition, after nine years in government, the party wings are fighting harder for benefices again. Above all, Kishida has to come to terms with the previous finance minister Taro Aso and the ex-head of government Abe and his – unsuccessful – surprise candidate for the office of LDP chief, Sanae Takaichi. Kishida will face his first test on the Monday after his swearing-in, namely with his personnel policy.

Political scientist Koichi Nakano from Sophia University does not want to write off the new head of government right away. “Kishida could establish himself as his own man over time, but first he has to win the lower house elections in November and the upper house elections next summer.”

Defending the absolute majority of the LDP would be an important step, said Nakano. “Otherwise, he might just end up being a softer looking and softer sounding version of Suga – and just as short-lived.” Suga only served a year.

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