Can Shinzo Abe Find His Way?

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it's a mystery that is bedeviling economists and politicians alike. Japan's economy has grown for 60 consecutive months, the longest period of growth in the postwar era. So why are ordinary Japanese consumers like Maki Nobata behaving as if the country were still deep in recession? "I'm trying to cut back on spending," says the 36-year-old Tokyo accountant, who received a meager raise of less than $75 a month nearly two years ago and hasn't had another one since. Adding to her worries, Nobata doubts the pension system will be in place by the time she retires. "I feel like I need money for saving and insurance rather than for spending and enjoying life. I don't feel confident the economy will continue to grow."

That insecurity helps explain why Japanese consumer spending has remained stagnant. Each month in 2006, households spent less than they did in the same month in 2005. A Cabinet Office report found that household sentiment swooned in December, and Japan's top three department stores reported declining sales in the run-up to the country's New Year holiday. While unemployment has declined from 5.4% in 2002 to 4.1% at the end of 2006, wages have gone nowhere. According to statistics from the Ministry of Health, Labour and Welfare, the average Japanese made $2,881 a month in 2002. For most of 2006, the average monthly wage was only $2,749. "The statistics say that the economy is in good shape, but people can't feel that," says Heizo Takenaka, the architect of Koizumi's financial reforms. "Those feelings are understandable."

Takenaka says he expects consumer spending to pick up as soon as deflation is finally conquered. In the meantime, Japanese companies are coming under fire for failing to pass more of their profits on to workers—and Japanese politicians are being criticized for crowing about a recovery that has been largely driven by business investment as companies gear up to meet the rising demand for exports to the U.S. and China. "There has never been a recovery dating back to 1945 that is so dependent on capital investment," says Richard Katz, editor of the Oriental Economist Report. Should the U.S. and China falter, he warns, the Japanese economy will have nothing to fall back on, given the weakness of domestic consumer spending. "This is not sustainable," says Katz.

And Japanese workers aren't likely to feel richer or more secure anytime soon. Corporations have kept wages in check in part by shifting more work to part-time employees, who now constitute over 33% of Japan's workforce, up from 20% in 1992. Business leaders insist wages must be suppressed for Japanese companies to compete globally, but Katz points out that enforced fiscal austerity is toxic for the economy as a whole. "If every company cuts wages at the same time, no one is going to buy your products," he says. "That is what's happening."

The shift to part-time workers is also exacerbating the income disparity that more than 90% of Japanese believe is a growing problem, according to a recent poll by the broadcaster NHK. Although Japan has never fully realized its self-image as ichioku sochuryu (the nation of middle-class people), the income gap is getting worse because the rich are getting richer while the poor are actually losing ground. According to the O.E.C.D., Japan is now second to the U.S. among developed countries in terms of relative poverty—the proportion of people living on 50% less than the median income. The gap is readily apparent in spending patterns. The only two categories of automobiles to show sales growth in Japan last year were ultra-cheap minicars and luxury imports.

Fears abound that the millions of young people who have never managed to land a full-time job might become a subclass permanently doomed to part-time work and paltry wages. "You have people competing for the diminishing number of good jobs, and a lot of kids just don't have the resources to compete," says Scott North, a sociologist at Osaka University. Those trends, he adds, may in turn worsen Japan's declining birthrate. "If you don't have stable employment, it'll be hard to get married, hard to raise children."

For Japanese worried about their country's direction, the depressed city of Yubari on the northern island of Hokkaido provides an ominous worst-case scenario. Once a thriving coal-mining town of 130,000, Yubari has shrunk to 13,000 people, with 40% of them 65 years old or over. In the 1980s and '90s town officials tried to stanch the economic decline by borrowing hundreds of millions to remake the city as a tourist destination, only to fail miserably—as Yubari's shuttered amusement park, melon museum and robot museum testify. After racking up over $500 million in debt—roughly 14 times the city's annual tax revenue—Yubari was forced to declare bankruptcy last summer, the first Japanese municipality to do so in 14 years. Late last year the city government announced a harsh fiscal-restructuring plan that would involve raising local taxes to the maximum while cutting public services to the bone. With its crippling debt, aging population and depressed job market, Yubari has come to embody many of Japan's ills. "All the problems that Yubari faces as a city are the same problems that Japan as a country faces," says Tatsuro Sasaya, a Yubari businessman. "It makes me wonder where Japan is headed."

Abe has taken the issue of poverty and social disparity more seriously than Koizumi did, appointing a special minister to take charge of a program designed to help the unemployed and underemployed refine their job skills. "We're hardly disregarding people's kitchens," says Nobutaka Machimura, a former Foreign Minister and influential LDP Diet member. But when Abe's feel-good rhetoric clashes with the economic realities of Japan today, he can look disingenuous or simply ineffective. At the LDP convention in January, Abe declared that "economic growth is not for business enterprises, it is for the public," and later called on Keidanren, Japan's leading business federation, to raise wages. But Keidanren head Fujio Mitarai has rebuffed those calls, lobbying the government instead to lower corporate tax and raise the consumption tax, shifting more of the financial burden to ordinary workers. "In his heart Abe feels consideration for households," says Tsuyoshi Takagi, president of the nearly 7-million-strong Japanese Trade Union Confederation. "Yet he's pushing reforms for [the benefit of] business. People are disappointed."

That complaint gets to the heart of Abe's political quandary. Japanese who feel uncomfortable with the reforms of recent years see Abe as just a friendlier version of the disliked Koizumi—while those eager for faster reforms have come to view Abe as an obstacle. Hisashi Hirano, an official with the Yubari government, couldn't stand Koizumi, but says that at least with him, "we knew where we were headed. With Abe you can't understand what his intentions are." At the same time, Koizumi's most ardent fans—especially the young, unaffiliated voters he lured back into politics—reject Abe as a conservative relic. "His popularity has fallen because he's not perceived as being radical enough," says Robert Feldman, chief Japan economist for Morgan Stanley. Feldman argues that Abe has actually been a much more aggressive reformer than he has been given credit for, citing the PM's willingness to challenge the power of Japan's entrenched bureaucracy behind the scenes. "He has created competition within government that is even better than what Koizumi did," Feldman says. But while Koizumi responded to opposition by shifting the blame to the old guard with accomplished political jujitsu, Abe and his novice team seem to lack the ability—or stomach—to take his fight for reform to the public. He punted on the critical question of whether to raise Japan's consumption tax to help cut public debt, delaying the potentially unpopular decision until after the summer elections—a worrying return to the pre-Koizumi politics of delay. No less a conservative icon than former Prime Minister Yasuhiro Nakasone argued in the Japan Times on Feb. 10 that Abe appeared "long on rhetoric and short on substance."

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