Abenomics After Abe: Japan's new prime minister can administer. But can he lead?

• Author: Kawamoto, Akira

Japan's parliament confirmed Yoshihide Suga this week as the country's new prime minister. He replaces Shinzo Abe, who announced his resignation last month for health reasons, after almost eight years in office. Japanese and international observers are now asking whether the Abe government's economic policy course (dubbed "Abenomics") will change significantly under Suga, and if so, how.

The answer will have important geopolitical implications.

Japan, after all, is still struggling to overcome the negative shock from Covid-19, and its economic health is becoming ever more pivotal in view of the deepening confrontation between the United States and China.

Many outside Japan might assume that Suga will change little, and he presented himself to the ruling Liberal Democratic Party as the "continuity" candidate to replace Abe. That was, perhaps, the best card that he could have played, having served as cabinet secretary, the second most powerful position in Japan, for the entirety of Abe's eight-year tenure.

On this view, Suga will remain safe by sticking closely to Abenomics. The massive quantitative easing undertaken since 2013 by Bank of Japan Governor Haruhiko Kuroda--an Abe appointee--will continue. Similarly, Suga will avoid vigorous and hasty fiscal tightening, even though the Abe government's pandemic response measures have further increased Japan's net public debt, which, at around 150 percent of GDP, was already the highest among developed countries.

But if Japan is to sustain its global position, Suga must make a clear break from his predecessor and patron, and pursue a broad range of structural reforms. Indeed, productivity-enhancing labor market and regulatory reforms are almost certainly the only way to increase Japan's economic growth.

Although Abe's policies helped to end Japan's deflationary stagnation, the overall record of Abenomics is not very impressive. Between 2013 and 2019, annual GDP growth averaged just 1 percent, and exceeded 2 percent in only two of the eight years of Abe's premiership.

Moreover, Bank of Japan data show that growth under Abenomics resulted mostly from increases in capital and labor inputs, rather than from productivity gains. Contrary to the conventional view that the Japanese economy faces strong headwinds owing to its aging population and shrinking workforce, the number of people in employment continued to grow throughout the Abe years, because more women joined the labor force. But with Japan's...