TOKYO – That loud ticking sound emanating from the Japanese capital is Fumio Kishida’s political clock counting down toward zero.
Approval ratings in the neighborhood of 30% tend to spell the end of Japanese governments. Prime Minister Kishida’s is now below 20% – and dropping as the economy sinks into recession and inflation outpaces wage growth.
The rising odds that Kishida will soon be shown the door is stellar news for Xi Jinping’s China and a dismal turn of events for Joe Biden’s White House.
Since grabbing the premiership in October 2021, Kishida has been as close an ally to US President Biden as any. And a pivotal one, representing a key pillar of Biden’s “Indo-Pacific strategy” to encircle an ascendant China.
At its core is the “Quad partnership” of the US, Japan, India and Australia. For Biden, Kishida is the indispensable Asia-region ally.
Lots was made of former prime minister Shinzo Abe’s bromance with Donald Trump. That bond, though, was between two populists looking out for their own short-term interests. The Biden-Kishida relationship is forged by worries about democratic backsliding and curbing China’s access to vital technology.
And the Biden-Kishida era could be over in short order, much to Beijing’s relief.
On Thursday, Kishida made a desperate plot to regain the momentum by reshuffling his cabinet – again. He tried the same gambit in September, with zero bounce in support rates.
This latest rejiggering has a whistling-past-the-political-graveyard vibe to it. Kishida’s move to replace four cabinet members implicated in a slush-fund scandal is good for a headline or two. But the odds of it signaling a reboot that revives the economic reform process are negligible at best.
That’s bad news for Asia. If past episodes of Liberal Democratic Party leaders on the ropes is any guide, Kishida will likely hang on for a few more months. During that struggle, he’ll be too busy struggling to save his job to do his job.
With Japan perhaps already in recession, this period of leadership intrigue leaves zero time to step up efforts to get Japan’s economy back on track.
Kishida will have even less political bandwidth to cut bureaucracy, increase innovation and productivity, catalyze a startup boom, better utilize female talent and remind the globe why Tokyo is still worth a look when thinking of places to headquarters companies and lost shares.
It hardly helps that China’s rise is quickening Asia’s economic clock. The more Tokyo squanders opportunities to raise its economic game and wages, the greater the advantage to Xi’s China.
For the rest of Asia, not so much. As Japan walks in place, its economy isn’t pulling its economic weight in a region in dire need of growth engines. From Seoul to Jakarta, Japan acting more as a drag on growth than as a growth contributor will dim prospects for 2024.
BOJ weighs options
The intrigue surrounding the Bank of Japan tells the story. Just two months ago, traders virtually everywhere thought the BOJ would pivot away from quantitative easing by now. Instead, China’s slowdown and news that growth contracted 2.9% in the July-September period from the previous quarter.
This was the steepest drop since mid-2020 when Covid-19 was savaging the economy. It also raises the stakes for BOJ governor Kazuo Ueda, whose team holds a highly anticipated December 18-19 policy meeting.
Though the BOJ is technically independent and above politics, fear of a backlash from Nagatacho, Japan’s Capitol Hill, helps explain why quantitative easing remains the law of the land 22 years on. Ueda’s team also knows that rising Japanese yields will make it harder for Kishida to increase spending.
Some make the argument that Kishida’s cabinet reshuffle could actually free the BOJ to act more boldly. That’s because ministers hailing for the political faction of the late Abe, which favors aggressive easing, have largely been vanquished.
“I see a decline in power of the Abe faction giving the BOJ more leeway and making it easier to go ahead with policy adjustments such as ending the negative interest rate,” says Takahide Kiuchi, economist at Nomura Research Institute.
After more than two years in power, Kishida hasn’t put any notable reforms on the scoreboard. Last month, he admitted that “we haven’t achieved a virtuous cycle of growth yet. The biggest problem we have is that wages haven’t caught up with inflation.”
Kishida’s plans to increase military spending markedly would require greater government borrowing. His “new capitalism” strategy to increase middle-class incomes would be quite expensive, too.
Suffice to say it’s not the most conducive political environment for the BOJ to be hitting the brakes. The same goes for the willingness of Kishida’s change-averse party to take risks on reforms to slash red tape across ministries, incentivize risk-taking, modernize labor markets and attract more foreign talent.
“Increased borrowing costs following BOJ monetary policy tweaks add further strain,” says Stefan Angrick, senior economist at Moody’s Analytics. “Sudden shifts in fiscal policy are another concern as the administration of Prime Minister Kishida grapples with a funding scandal that has engulfed much of the party’s senior leadership. All of this makes for a very subdued picture.”
Economist Takeshi Minami at Norinchukin Research Institute counters “that weak growth and the specter of slowing inflation could delay the BOJ’s exit from negative interest rates.”
Kishida’s chronic weakness is a blow to the 10 biggest economies looking for all the growth engines they can find. Here, the world’s third-biggest economy shifting into higher gear would do quite nicely.
China’s difficult 2023 has been a global headwind few saw coming. In November, for example, imports dropped 0.6% year on year. “The data further dimmed hopes on a consumption-led recovery in China and more policy support are needed to stimulate demand,” argue UBS analysts.
Worse, Beijing is fending off “Japanification” speculation.
“The persistent underperformance of China and Hong Kong stock markets against the rest of the world has been driven by past ‘unfriendly’ private-sector policies enacted in China, lingering geopolitical tensions with the US, and the right now heightened deflationary risk spiral due to the liquidity crunch inflicted in the property market where it has a significant wealth effect on China’s society,” says Kelvin Wong, senior market analyst at Oanda.
Continued trouble in China’s default-plagued property market is likely to weigh on global confidence in 2024. Europe, meantime, is walking in place led by an underperforming Germany.
The US is buckling under the strain of the most aggressive Federal Reserve tightening since the mid-1990s. Though the biggest economy continues to beat the odds and avoid recession, the highest 10-year yields in 17 years are undermining business and household confidence.
Amid such doom and gloom, a more dynamic Japan would be a big plus for Asia. But Kishida’s government has little, if any, clout with opposition lawmakers – or voters – to execute the upgrades needed to stir Japan’s animal spirits.
That’s stellar news for China, as it gives Xi’s economy even freer rein to dominate Asia. Bad news for Biden, who had hoped Kishida’s government would be a bulwark against Asia’s economic superpower.