Yoshihide Suga is Japan's new prime minister following eight years of stability under Shinzo Abe, who resigned due to poor health. Suga served as chief cabinet secretary under the Abe administration for the whole time, so his leadership is being seen as an extension of Abenomics rather than a replacement.
That being said, like many world leaders, Suga is also undertaking a delicate balancing act between limiting coronavirus spread and keeping the economy running. So it is worth looking at what these first weeks of the Suga administration have revealed about what comes after Abenomics.
- Prime Minister Suga is largely expected to continue Abe's fight against deflation in Japan through stimulus and loose monetary policy.
- There are early indications that Suga is not entirely averse to picking fights in the private and public sector.
- Digital transformation and other policies will have incremental benefits to Japan, but deregulation and immigration reform may ultimately be the country's only path to long-term growth.
Where Abenomics Stalled
Abenomics was defined by its three arrows of fiscal stimulus and loosening monetary policy to spur growth combined with structural reforms to modernize Japan's economy and manage the economic effects of its aging population. These arrows were updated over time with more specific targets like increasing women's participation in the workforce to address the growing labor shortage due to the greying population.
Abenomics did not achieve all its lofty aims, such as the 2% inflation target, but it did pull the country out of its prolonged deflation. The most disappointing misfire to investors, however, was the third arrow. Structural reforms in Japan have been minor when they have occurred at all. It is an issue that Suga himself has noted when trying to move new policies forward.
What We Know About Suganomics
Suganomics is starting during a sensitive time as far as making large changes. Suga has already committed to continuing economic stimulus and the key elements of Abenomics. To combat the effects of coronavirus, the administration is looking to get more bridge financing to businesses to help protect jobs. Despite playing defense on the economy due to the pandemic, Suga has hinted at his willingness to pursue structural reform in both the private and public sectors.
In the past, Suga has called out mobile carriers for not competing and overtly profiting off public infrastructure investments. He renewed his call for lower bills and data rates after winning the leadership, and it is expected that he will continue to push the industry.
Suga has also made digital transformation of the public service a priority. In a country that still relies heavily on personal seals and physical paper records, widespread digital transformation and innovation may help to bump overall productivity. At the very least, it may help streamline some of the hurdles that new businesses and entrepreneurs face in Japan.
Perhaps the most interesting shift is the push by Japan to replace Hong Kong as an international banking hub. This is still an aspirational goal with very little defined policy, but it does look like a number of incentives are being considered, including tax breaks, sped-up business approvals, and special economic zones. Bringing in more international finance could also help Japan with its lagging corporate and structural reforms. A lot of that reform has to happen in advance, however, if Tokyo or Osaka are aiming to replace Hong Kong.
What Remains to Be Seen
Suga is seen as a figure who is more feared and respected than well liked. Whether he can use this fear, the pandemic situation, and a tireless work ethic to push through the stalled structural reforms of Abenomics remains to be seen. There have been other hints at policy choices that, if true, would be positive for Japan. One is a modernization of domestic agriculture, allowing consolidation and economies of scale to be realized. That will be difficult for Suga, who comes from Akita, one of the prefectures in largely rural Tohoku, and likely still has connections to the small-scale agriculture that is typical in Japan.
An even more contentious area in which Suga may be willing to exert influence is immigration. He helped to reform visas for foreign workers as chief cabinet secretary and will no doubt see this as a solution to address the labor shortages facing Japan. This solution has, of course, occurred to previous administrations, but there is still a strong domestic push against it to overcome.
The Bottom Line
Suganomics will largely be a continuation of Abenomics – a years-long fight against deflation and demographics. The interesting question for investors is whether Suga has the determination and political support to get Abe's third arrow of structural reform back on target. Digital transformation and cheaper mobile bills are nice, but Japan needs something drastic like expanded immigration and deregulation to move the needle at this point.