Japanese PM Shinzo Abe Rocks the Domestic Economy

Readers will remember that in recent weeks the tensions between China and Japan over the uninhabited Senkaku/Daioyu Island chain increased due to China claiming that the airspace over the region fell under Chinese air defense. Japanese protests were joined by the United States and the European Union, however this last week has seen a tangible effect in the Japanese economy of the fallout from this impasse. The current Japanese Prime Minister Shinzo Abe, who has been aggressive towards potential threats to domestic security, has announced this week that defense expenditures will be increased by over $200 billion in the next five years. This influx of resources to the Self-Defense Forces, as Japan is constitutionally unable to have an officially offensive military, will be partially used to buy a number of new F-35 fighter planes, surveillance aircraft, amphibious combat forces, and two Aegis warships. This sudden change to a more martial stance is justified as a Japanese response to increasing instability throughout East Asia, but it seems obvious to many observers that this is largely directed as a warning to China. Prime Minister Abe has also suggested potential revisions to the Japanese constitution, specifically Article 9 that bans Japan from having a formal army.

The Japanese Finance Ministry initially opposed the increase in defense spending, especially as it has sought to trim around $40 billion from the budget. Over the last thirty years Japan has experienced a relatively stagnant economy and general dissatisfaction with the economy, which is bolstered by the extreme contrast from the growth and wealth generated from the postwar boom years that ended in 1989. With at least two generations of Japanese youth looking forward to a gloomy job market and a standard of wealth below their parents and grandparents, Japanese politicians and officials have been desperately trying to jump-start the economy. And, as public debt is now double the revenues produced yearly by the Japanese economy, the Finance Ministry was initially dubious of the proposed defense spending. However, Prime Minister Abe has been able to convince the ministry of the need to strengthen Japan’s military.

However, Prime Minister Abe is not otherwise known as much of a spendthrift. Prime Minister Abe has passed a series of sales tax increases, a 3% increase this year followed by another 2% increase to a total 10% sales tax in 2015, designed to offset the costs of social security. He has also strategically increased government spending, particularly to rebuild areas impacted by the 2011 Tohoku disasters, and shook up the central bank to end deflation. This has decreased the cost of Japanese exports abroad, boosting the sales of Japanese products internationally. This is not dissimilar to one of the causes of the Japan boom in the 1980’s, and seems to be geared to foster a return to prosperity.

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