The re-emergence of Japan

In less than a year of winning re-election, Mr Koizumi resigned from the prime ministership of Japan. Far from being a disruption, it is a continuation of the disruptive forces that he unleashed in Japan since he became the prime minister for the first time in 2001. This note underscores the message that the economic revival in Japan would go hand-in-hand with political nationalism.

In late September, Mr Shinzo Abe took over as Japan?s prime minister from Mr Koizumi, by getting elected as the president of the Liberal Democratic Party (LDP). Mr Abe served as cabinet secretary under Mr Koizumi. Hence, he was intimately associated both with the political and economic policy changes that Mr. Koizumi had initiated.

Mr Abe has advocated a policy of honouring Japan?s war dead, although in the eyes of the West and her neighbours, Japan?s wartime heroes committed many atrocities. Mr Abe belongs to a school that believes that history is necessarily biased as it is usually written by the victorious. Hence, he has decided to pursue a policy of visiting the controversial Yasukuni shrine without making it a public affair. His selection of personnel to two key posts in the LDP reflects his thinking.

He picked a pro-growth fiscal conservative and a fellow nationalist cabinet minister to two top posts in the ruling Liberal Democratic Party. Hidenao Nakagawa?considered one of Abe?s closest aides?was named secretary-general of the ruling Liberal Democratic Party. Nakagawa backs better relations with China, cuts in budget spending and has argued against raising taxes. He picked a foreign policy hawk, Shoichi Nakagawa, to head the LDP?s policy research council. Nakagawa supports a hard line on North Korea, history textbooks that play down Japanese wartime atrocities, and visits to Yasukuni war shrine (source: Washington Post).

Despite this, he managed to convince his neighbours?China and South Korea?of the need for a summit meeting and secured one immediately. That North Korea had threatened a nuclear test over the weekend helped. Notwith-standing this di-plomatic overture, Mr Abe refers to a ?future-oriented? relationship with his neighbours.

His selection of Mr Shiozaki to be his cabinet secretary underscores his recognition of the importance of coordinating policies with the Bank of Japan. Mr Shiozaki was with the Bank of Japan for 11 years. Mr Abe?s surprise selection was Mr Koji Omi as the finance minister. Mr Omi has extensive experience in taxation. Mr Abe attaches the greatest importance to tax reforms and to cutting the Japanese fiscal deficit and gross public debt that ballooned in the Nineties. At the same time, the contemplated hike in sales tax is going to be ushered in only after elections to the Upper House next year. There is no attempt to put fiscal rectitude on a pedestal at the expense of economic growth. It is pragmatic.

Overall, the cabinet received only mixed reviews in the local media in Japan and among the investment community. Radical reforms are expected of Japan and hence radicals were expected to be named to the Cabinet. However, an explicit approach to policy reforms would still be atypical of Japan.

Mr Koizumi rev-ealed little refor-mist instincts when he was campaigning for the Prime Minister-ship in 2001.

Mr Abe would pursue a similar path at least initially until his own power base is sol-idified in the elections to the Upper House next year.

After a lull in the summer, the economy appears to be recovering again. Large manufacturing firms are feeling upbeat and yet, in classic understatement, are cautious on their outlook for profits. The small business sentiment is growing. The labour market is improving and when that improvement shows through in wage growth, private consumption will pick up. If growth continues as I expect, the stock market and the yen could gain in tandem in the New Year.

Japan is acutely aware of the resurgence of China at precisely the time when its own growth slowed and the economy appeared to enter into terminal decline. Hence, the power balance in Asia shifted in favour of China in the ?90s. Now, Japan?s banks have gone through the purge while China?s banks are yet to face their moment of reckoning, after years of binging on loan growth.

Japan?s natural desire to punch in accordance with her weight in international affairs has to be accompanied by economic growth. Both aspirations are tied to and feed off each other. The new leadership in Japan is aware of that. These are interesting times in Asia and unlike in the ?90s, Japan is bound to be in the centre of it all. Upon taking office, the Japanese prime minister said that he would work on a strategic dialogue with democracies in the region such as India and Australia. The Indian government did not react to that remark. The relationship with Japan is pregnant with possibilities in the light of the developments in North Korea and the entanglement of that with both China and Pakistan.

One gathers that the Indian Prime Minister is visiting Japan in mid-November. If so, it is a welcome development. In foreign policy, India must learn to think strategically and not sentimentally. It might sound obvious but its application in our foreign policy is not so obvious. It would be a big error to place our chips on China and d?tente with Pakistan and ignore the re-emergence of Japan.

?The writer is head of research, Asia Pacific and Middle East, Bank Julius Baer, Singapore. These are his personal views. He can be contacted at jeevatma@gmail.com