Ghost Of John Maynard Keynes Haunts Japan’s Economy

When Fumio Kishida became prime minister last October, few of us longtime Japan observers expected much at all.

Yet the 64-year-old has been surprisingly present and, dare I say, productive as Covid-19 does its worst, China pushed its weight around and Russia invaded Ukraine. On this last one, Kishida was quick to sign on to sanctions and remind the globe Japan is a vital democratic player.

The bad news, though, is that Kishida’s economic ambitions have been, for the most part, a dud. That is evidenced by news that factory output fell for a second straight month in January. It fit with other indications that hopes for an economic rebound this quarter are sure to be dashed.

The good news here is that Kishida has it in his power to turn things around. In the weeks ahead, he plans to put meat on the bones of the “new capitalism” pledge he rode to power. Essentially, it means prodding cash-rich companies to fatten paychecks—particularly those for middle-class workers.

The enterprise is widely popular in Japan. There’s a growing realization, though, that the 147 days Kishida has been premier should’ve been enough time not just to detail his wealth-redistribution plans but to get some of it implemented.

Kishida’s idea, after all, isn’t particularly novel. Over in neighboring South Korea, President Moon Jae-in has been buzzing about “trickle-up growth” since 2017. China’s Xi Jinping is engineering something his Communist Party calls, without irony, “common prosperity.”

The problem for Kishida: Japan is the economy that cried wolf. For 21 years now, since the days of Junichiro Koizumi’s 2001-2006 premiership, global investors have seen 10 leaders promise to raise Japan’s economic game and achieve little.

To be fair, Koizumi privatized the sprawling Japan Post and ended the bad-loan crisis from the 1990s. Since then, Japan has seen little in the way of genuine structural reform that increased competitiveness.

Sure, Kishida’s patron, Shinzo Abe, tightened corporate governance a touch during his 2012-2020 tenure. But mostly, Abe prodded the Bank of Japan to ease more as he shelved painful upgrades needed to increase innovation and productivity.

Can Kishida break the cycle? He’ll have to pick up the pace dramatically if this government is going to be remembered as a game-changer—not just another cautionary tale.

After covering all 10 of these governments on the ground in Tokyo—from Koizumi to Kishida—I know better than to be too optimistic. Yet Kishida could gain some traction quite quickly just by showing a bit of political will.

With the economy flatlining again, the play is going to be more stimulus spending. Japan is still lagging behind its peers in recovering pre-pandemic levels. It’s not where Kishida’s Liberal Democratic Party wants to be ahead of an election this coming summer. Ongoing supply-chain disruptions, ones forcing Japan’s biggest automakers to cut production, are sure to buttress the desire for short-term thinking.

Yet another fiscal package and more BOJ bond purchases won’t revive Japan’s animal spirits. The ghost of John Maynard Keynes continues to haunt a government that forgot true economic energy comes from persuasion, not just government spending. 

The reason most Japanese workers haven’t had a notable pay raise in eons is that CEOs lack confidence Japan’s economy will be more vibrant three, five or 10 years from now. So, they sit on cash or buy back stock.

Kishida should make good on pledges to loosen labor markets, reduce bureaucracy, catalyze a start-up boom, prod corporate giants to take risks, empower women and attract foreign talent. Basically, all the things Abe talked about for nearly eight years in power and didn’t do.

One economic win Kishida can bank is U.S. President Joe Biden’s move earlier this month to lower tariffs on Japanese steel. Abe sucked up to Donald Trump for four years and couldn’t score this concession from Washington. At a moment when China is dominating most conversations in Asia, it was a diplomatic coup Kishida—and his party—really needed.

It’s time for an economic reform coup. A critical mass of Japan’s 126 million people will welcome shaking up their rigid economy as tech unicorns sprout up all around a region it used to dominate. The same may be true of power brokers in Kishida’s party—Abe included—realizing that the lack of a regulatory Big Bang these last 20 years dimmed prospects for the next 20.

Kishida has a unique opportunity to shock the naysayers who’ve come to expect little from Japanese leaders. But he needs to get to work immediately—before Tokyo’s revolving door starts spinning anew.