In his first policy speech after taking office in October 2021, Japanese Prime Minister Fumio Kishida promised to “rebuild the economy in good faith” after three decades of stagnation.
In a speech to parliament nearly two years later, Kishida said the economy was most important to him “above everything else”.
“The Japanese economy is facing a unique and unprecedented opportunity to undergo a transformation not seen in 30 years,” he told lawmakers.
“In order to take advantage of this opportunity, I am determined to take drastic measures that have never been seen before.”
As Kishida prepares to step down following the Liberal Democratic Party’s (LDP) leadership vote in his disgrace on Friday, the Japanese leader is leaving behind an economic legacy characterized by little gain, rather than change.
“The Kishida administration followed the same economic strategy as the Abe and Kan administrations, which was to create a virtuous circle from rising wages, leading to growth and inflation,” Shigeto Nagai, Asia head of Oxford Economics, told Al Jazeera.
Once seen as a challenge to the economic power of the United States, Japan’s economy has been reeling since the collapse of the massive stock market and real estate bubble of the early 1990s.
Japan’s gross domestic product (GDP) today is still below its peak in the mid-1990s. Wages for its workers have not grown since the height of the bubble, rising below $1,200 from 1991 to 2022.
After taking power in October 2021, Kishida called for a “new capitalism” that would encourage innovation and growth while ensuring a fair distribution of the spoils.
In fact, Kishida, 67, was pursuing policies most of which were very close to the grand planks of “Abenomics”, coined by his predecessor Shinzo Abe, namely deficit spending, austerity and structural reforms.
“Kishida’s new capitalism aims to adapt to Abenomics by further encouraging start-ups and the greater adoption of digital technologies, including policy support for semiconductor manufacturing, access to key mineral supply chains, and improving transport and communications infrastructure,” Craig Mark, the adjunct. an economics teacher at Hosei University in Tokyo, told Al Jazeera.
“The new policy of capitalism also promised to continue to try to reduce gender inequality, and to help families with the costs and burdens of raising children.”
Kishida, who suffered from low approval ratings during his tenure amid a series of scandals involving his LDP, has also introduced his own major policies, including a major expansion of tax incentives aimed at encouraging the public to invest more of their savings in stocks. the market.
“The shift in large household assets, which have been concentrated in bank deposits and insurance products, to riskier ones such as domestic and foreign equities and bonds is helping to revive the strength of the Japanese economy on the financial side,” said Nagai of Oxford Economics. .
Arguably Kishida’s most important decision was his appointment of Bank of Japan Governor Kazuo Ueda, who in March raised interest rates for the first time since 2007, marking a break with decades of loose monetary policy.
Although Kishida has overseen positive changes in some areas of the economy, progress has been uneven, casting doubt on the prospects for long-term economic reform.
After Japan’s economy grew by 1.9 percent in 2023 – one of its strongest performances in decades – GDP stagnated in the first half of this year.
“The BoJ finally increased the base rates to 0.25 percent, which shows the expectation of a developing economy, but despite some positive growth in 2023, especially in the export sector, the Japanese economy has been weak overall, especially in domestic consumption,” said Mark. .
Japan’s economy remains vulnerable to external shocks, including “China’s faltering economy, instability in the Middle East and Europe, and the possible return of another Trump administration”, Mark added.
Although Japan’s biggest companies in March announced their biggest wage hikes in 33 years, heeding Kishida’s calls for higher wages in the private sector, workers’ wages have started to outpace inflation recently.
Real wages rose 1.1 percent in June, the first gain in more than two years, followed by a 0.4 percent increase in July.
And while Japan’s benchmark Nikkei 225 stock index hit a record high in 1989 earlier this year, the market has recently been marked by significant volatility and has given up much of its gains.
“Recent positive economic signs, such as higher stock prices and rising wages, are the result of an excessively low yen and relative inflation, which has already reversed,” Naohiro Yashiro, dean of the Faculty of Global Business at Showa Women’s University, said. Al Jazeera.
Ryota Abe, an economist at Sumitomo Mitsui Banking Corporation, said that while he believed it was “too early” to judge Kishida’s economic record, there were signs of positive progress compared to the past.
“In the second half of this year, the economy recovered at a faster pace than the market expected, suggesting that domestic consumption improved due to better wage growth,” Abe told Al Jazeera.
“Looking ahead, as people’s wages are expected to improve while inflation will decrease, domestic consumption may support economic growth in the coming quarters.”
Some analysts are less optimistic.
Yashiro said the recent increase in wages reflects inflation rather than productivity growth that could spur sustained economic growth.
“Japan’s economy has made little progress under Kishida, with wage growth stagnating after the last three years of inflation,” Yashiro said, describing recent signs of economic recovery as “faint”.
Economists widely agree that Japan faces major obstacles to a sustainable economic recovery, including a declining population, weak productivity and a volatile labor market.
The East Asian giant’s growth prospects in the near term are incredibly slim.
In July, the International Monetary Fund cut its forecast for economic growth in 2024 to 0.7 percent from 0.9 percent, citing disruptions in the auto industry caused by a security scandal involving a subsidiary of Toyota Motor Corp.
The financial institution predicts a similar average growth of 1 percent in 2025.
“With a shrinking population, despite the fact that foreign workers have now reached an all-time high of about 3 percent of the workforce, even if Japan accepts more immigrants, which is highly unlikely, this will not be enough to combat the inevitable long-term stagnation, which may be partly solved by introducing more about technology like robotics and AI,” said Mark.
“The long-term challenge for Japan, like other developed societies such as South Korea and the EU, will be to see if it can manage the transition to a shrinking economy, yet maintain sustainable, balanced prosperity. high standards of living, using high technology and renewable energy.”
Nagai said Kishida’s ability to implement the kind of reforms needed to secure Japan’s future prosperity has been hampered by political realities.
“Despite his limited influence in the ruling party, political storms, including the scandalous financial scandal of the ruling party, have led to a decline in public support for his government,” he said.
“This fragile political base means that he has been unable to make the drastic changes needed to revive Japan’s economy in the long term but which will be painful in the short term, and his fiscal policy tends to focus on short-term relief measures. while avoiding serious discussions about fundraising measures. “