The decisive victory of the Liberal Democratic Party of Japan on Sunday is unfortunate in that the new government, to be led by Shinzo Abe, will not pursue the Trans-Pacific Partnership trade negotiations, but Mr. Abe is right to advocate an inflation target of 2 per cent – equal to Canada’s.The Japanese economy is still one of the world’s largest and richest, but it has been nearly static for a couple of decades. The Bank of Japan has been trying to fend off deflation. Deregulation could renew the economy’s dynamism, and the ambitious TPP negotiations, which the outgoing Prime Minister, Yoshihiko Noda, proposed to enter, would surely have reinvigorated Japan. In the absence of such an opening, an expansionary monetary policy is all the more desirable.
During the election campaign, Mr. Abe alarmingly spoke of “unlimited monetary easing” – as if to keep up with the Bernankes – but now that he has won, he has reined himself in, recommending a reasonable inflation target.
Mr. Abe’s reputation as a nationalist has also been worrying, considering Japan’s dispute with China over the islands known (respectively) as Senkaku and Diaoyu. Sensibly, he has now said, “China is indispensable for Japan’s economic growth; it is necessary for the development of Asian countries that Japan and China maintain good relations.” It would be better still if he were to call for an international arbitration on those unhabited islands.
Nonetheless, Japan should eventually normalize itself and modify the pacifist article in its Constitution. East Asia would benefit from a better balance of military power in the region.
The apparent return to power of the once-ineviable Liberal Democratic establishment is not ideal, but so far Mr. Abe has been speaking prudently. Looser money will at least be good for the overvalued yen and Japanese exports. The Japanese have paid a heavy price for their comparative economic orthodoxy. Mr. Abe is bringing some worthwhile change, but nothing as fundamental to the country’s competitiveness as the TPP would offer.