How did Japan’s conservatives fall in love with dovish economic policies?

The Liberal Democratic Party’s (LDP) presidential election, which will essentially decide who will be outgoing Kishida Fumio’s successor as Japanese prime minister, is shaping up to be a crowded field. At this moment, seven LDP parliamentariansincluding cabinet members of the Kishida government, are expected to throw themselves into the ring. Depending on whether other hopeful candidates can collect 20 public statements of support – a minimum requirement to participate in the LDP elections – the field could grow even further. Candidates must formally enter the race by September 12.

As stalwarts of the LDP, all contenders will agree on basic principles and policies, such as constitutional reform and a robust alliance with the United States, but there is also a clear division in one specific area – specifically economic policy.

There are the so-called fiscal hawks, represented by contenders like Kono Taro and Ishiba Shigeru – both of whom have already announced their candidacy – and Motegi Toshimitsu, who is expected to join the cohort. The “hawks” advocate a cautious monetary policy that will improve Japan’s debt situation, which has ballooned in recent decades, and recommend that the Bank of Japan raise interest rates both to curb inflation and achieve fiscal stability.

Even before the BOJ announced its latest rate hike at the end of July, Kono And Motegi have advocated such measures. Moreover, he said at the press conference where he announced his candidacy Kono emphasized the need for budgetary discipline, which is a defining characteristic of the ‘hawks’. Ishiba has been even more consistent and passionate in his economic stance. Ishiba, a longtime rival of former Prime Minister Abe Shinzo, was an outspoken critic of “Abenomics,” which relied heavily on monetary easing.

The budget pigeons have a very different view of monetary policy. From the perspective of the doves, a group largely populated by ideologically conservative members of the LDP, the extraordinary monetary easing is a remedy for decades of deflation that has limited Japan’s economic growth. In this view, Japan’s recent inflationary spiral should be seen as a sign that the seed that conservative icon Abe planted is beginning to bear fruit. And as heirs to Abe’s legacy, the doves believe they should continue his monetary easing and increase government spending, which would help revitalize Japan’s economy.

The candidate who most represents the forgiving perspective is Kobayashi Takayuki, former Minister of Economic Security of Kishida. Kobayashi, the first person to officially announce his candidacy for the LDP presidential elections, laid out his moderate monetary view in his manifesto policy. Declaring that “the economy takes priority over finances”, he pledged to “invest boldly in local regions” and “profoundly support small and medium-sized businesses to increase their profits”, leaving no doubt that fiscal discipline as a secondary goal will be addressed in a Kobayashi administration.

Together with Kobayashi, Takaichi Sanae, a nationalist politician Abe’s favorite candidate participated in the 2021 LDP elections and is looking for a second chance this year, is a staunch supporter of easy monetary policy. In 2022Even as the cost of living began to rise due to external factors such as the pandemic-induced supply chain disruption and the war between Russia and Ukraine, Takaichi unashamedly declared that Abe’s policies had worked, and that Kishida had thus resolved the situation had to continue supporting. extraordinary monetary easing. Takaichi is also as forgiving on fiscal policy as Kobayashi seems; She is expected to advocate for “aggressive fiscal stimuluswhen she applied for office.

Historically, the budget hawks have represented the LDP’s majority opinion. From 1960 to 1996, four of the sixteen LDP prime ministers were Finance Ministry alumni. ten of them were once the heads of the same ministry, which made budgetary responsibility an organizational priority during the post-war period. Among them, Ohira Masayoshi was most adamant in achieving prudent fiscal policy, leading him to propose extensive indirect taxes, including a consumption tax increase that did not sit well with the public.

However, in recent decades, two major factors have led to the rise of accommodative economic policies within the LDP. The first was the economic downturn of the 1990s. In the early 1990s, the Japanese financial sector, whose portfolio was mainly focused on real estate, was suddenly burdened with a huge debt problem as a result of the market crash and plummeting real estate values. To resolve the situation, the LDP government became generous in increasing government spending – thus opening an opportunity for future moderate economic policies. That is why bond issuance has been on an upward trend since 2010 nineties.

The second factor was Abe Shinzo. Because the LDP mainstream and economic orthodoxy had favored the aggressive side of the economic policy debate, the Doves have long been considered “losers.” In fact, the LDP’s economic doves were indeed described as such because their ranks were filled with bureaucrats and politicians who were considered fringe figures, the researchers said. Ono Nobukatsu‘s book, which profiled the rise of the pigeons.

That changed in 2012. Abe — who was ousted from power in 2007 after his government focused heavily on conservative red meat rather than bread-and-butter issues for the general public — tried to stage a comeback. He saw a softened economic policy as a breakthrough from the economic malaise Japan was facing, but also as a policy platform that would show that he had actually learned from the mistakes he made during his first term.

The fact that Abe’s signature economic policy package, Abenomicswhich included pillars such as ‘aggressive monetary policy’ and ‘flexible fiscal policy’ – which included the hallmarks of an expansionary economic policy – ​​marked a major victory for the doves, who managed to convert Abe to become one of their own. Although the two goals Abenomics sought – “Down with deflation” and “wealth expansion” – did not fully materialize, the bold monetary easing in coordination with the BOJ significantly boosted stock prices and contributed to Abe’s continued success in the polls. And as his power in the party grew stronger and the number of like-minded conservatives simultaneously grew, his views on the economy shifted to the mainstream conservative position.

However, while the budget pigeons had enormous influence on Japanese economic policy under the Abe administration, his death appears to have withdrawn their influence. After Abe’s death, Kishida replaced Haruhiko Kuroda – de facto Abe’s monetary policy czar – with Kazuo Uedawho appeared to take into account conservative demands for monetary easing during public hearings, but still took the initiative important revisions for Japanese monetary policy. Moreover, the slush fund scandal, in which a large group of Abe faction members – mainly tax pigeons – were complicit, may further reduce the pigeons’ influence.

Continuing the flexible economic policy seems unfeasible at the moment. Although Western industrial societies have maintained extremely low interest rates since the 2008 recession as inflation raged, they have raised rates again to tame it. In doing so, they left Japan behind, putting downward pressure on the yen and driving up the cost of inflation. the imported goods on which Japan is highly dependent. And while the by-the-book policy to keep inflation under control would be to raise interest rates, Japan’s massive national debt has made things difficult. Doing so would further increase the interest costs of the bonds that already exist 24 percent of the national budget.

Given the current situation in Japan, the economic solution would be to gradually raise interest rates while making government spending less dependent on public debt. Despite the realities of Japan’s economy, however, conservatives who want to join the LDP leadership race are pushing hard for policies that appear to go in the opposite direction. The fact that policies are being advocated that deviate from reality shows that economic relaxation has become a more important tenet of Japanese conservatism than rational economic policies that can stand the test of time.