The world’s economy is expanding too slowly to quickly lift more people out of poverty. It needs at least one big country to make difficult reforms and become a strong engine for global growth. Of the four largest economies (Europe, United States, China, Japan), the US has recently boosted its growth rate the most. But after an election on Sunday, Japan could soon join the US as a potential engine.
The election result in Japan gives an important boost to Prime Minister Shinzo Abe and his efforts to get Japan’s $5.9 trillion economy out of a two-decade-long slump. His ruling Liberal Democratic Party and a coalition partner now control the Upper House, giving him solid majorities in the parliament.
Unless entrenched interests again are able to defeat reform efforts, Japan may well see these badly needed changes: rising consumer demand, a better environment for entrepreneurs, and a more open economy.
Loosening the grip of tradition isn’t easy for Japan. Many of its workers have enjoyed lifetime job security. Its powerful rice farmers and mom-and-pop stores are too protected from competition. Big companies enjoy privileges that start-up firms do not. Well known for its quality of cars, Japan sometimes drives its economy by clinging to the rearview mirror rather than the steering wheel.
So far, Mr. Abe has shown astute resolve in implementing reforms, known as “Abenomics.” The central bank has flooded the economy with money to fight back 15 years of deflation, or the self-perpetuating lowering of prices. He has joined negotiations for a regional free-trade pact known as the Trans-Pacific Partnership. And he has laid the groundwork for reducing Japan’s outsized debt.
Japan is in a race to out-reform its Asian rival, China, which also faces sluggish growth. Unlike China, Japan is a democracy and thus better able to respond to popular demand and against elite interests. China did make one key reform last week – weakening the power of its state banks – but has yet to boost consumer demand by improving interest rates for household savers.
In large part, Japan’s reforms require a cultural shift. More Japanese companies and workers must not be afraid to fail, or what economists call “creative destruction.” To encourage more risk-taking, Abe must change the way that banks give loans to small businesses. Companies must also be granted more freedom to dismiss workers.
Strong leaders in Japan often get hammered down. The country has had seven prime ministers in just seven years. Its society prefers creeping consensus. But Abe has shown the political patience to build support for reform. His nationalist appeal has been helped by China’s threatening military moves. And his moves so far show promising results in rising stock prices and consumer demand.
The world economy needs a healthy Japan, not only for growth but as a model of how the world’s democracies – especially in Europe right now – can make hard decisions on reform. Sacrifices are easier if shared. Democracy, for all its flaws, is the best way for shared sacrifice.
Many elections in Japan have mattered little in the past. Sunday’s vote, however, may resonate far beyond Japan.