Japan's Taro Aso has overstayed his usefulness

Japan's septuagenarian finance minister is wasting his opportunity to restructure the world's third-biggest economy for the long term. A new scandal only underlines his failings.

We continue FinanceAsia's Finance Minister of the Year study with another minister who combines gaffes and scandals with limited progress on the economic front. The latest cronyism scandal only confirms his lowly place in our list. 

RANKED 9TH: Japan's Taro Aso

The world’s third-biggest economy is enjoying its longest run of growth in 28 years, employment is at its highest level since the late 1990s, and equities are just below 26-year peaks. Fine right?

“Despite this relative calm, we are keenly aware that Japan’s current monetary policy is unsustainable over the long term,” said Ken Maeda, head of Japanese equities at Schroders. FinanceAsia agrees. Led by Shinzō Abe, the government is squandering its recently acquired political capital after its election win on October 22, as well as the tailwind from the global economic recovery.

Abe and his ally, deputy prime minister and Minister of Finance Taro Aso, are doubling down on reflationary policies, betting aggressive monetary stimulus will banish deflation. But to little effect so far. Core CPI was up a paltry 0.9% year-on-year in December, well below the Bank of Japan's 2% price goal. Wages have so far failed materially to respond to an increasingly tight labour market and productivity trails that of the US and Germany.

Instead, they should be pushing through structural and fiscal reform to lower the government debt of over one quadrillion yen, or 218% of GDP as of 2016, which is the highest of any major economy. This wasted opportunity is reflected in the MoF’s draft budget for the fiscal year ending March 2019, which at ¥97.7 trillion represents a sixth-straight year of record-busting numbers.  

While we applaud the budget’s growth-enhancing policies, such as access to childcare services and incentives for companies to increase wages, there is no major structural reform. Abe tasked Aso with achieving a sustained trend of debt reduction — and on that score, there has been no significant progress yet. The one major reform Aso has pushed for, a consumption tax hike, has been delayed twice and is now scheduled for October 2019..

Aso is not unaware of the danger. He told a Columbia University seminar last year: "If we abandon our efforts on fiscal discipline, that could invite a bust in Japan's finances or runaway inflation that would have a detrimental effect on the general public." But it stretches belief that the leader of the second-largest faction within the ruling LDP party, he cannot make his call for fiscal prudence heard.

Back in 2015, Aso pinned his government’s credibility on achieving a primary budget surplus by fiscal 2020. In 2017 he walked back that target. "We must create a target that falls on either fiscal 2022 or fiscal 2023," Aso told reporters on September 26.

To be sure, tax revenues have been growing in lockstep with economic growth, which averaged 1.2% per year between 2013 and 2017. Japan can also always rely on the home bias of its citizens – they buy Japanese government bonds en masse. However, this will not be enough.

In addition, 77-year-old Aso scores lowly on keeping tabs on the risks of financial innovation, not least with cryptocurrencies, given the 2014 collapse of virtual coin operator Mt. Gox. When Tokyo cryptocurrency exchange Coincheck was hacked on January 26 it lost ¥58 billion ($533 million). Belatedly Aso told the Japanese parliament's lower house budget committee that Coincheck's security setup "lacks basic knowledge and common sense".

So we’re not confident that the MoF under Aso is fulfilling its responsibility for maintaining financial stability through an effective crisis response. He should be more aware given he was previously prime minister during the global financial crisis.

That doubt is compounded by Aso’s announcement in August that the Financial Services Agency’s Inspection Bureau, which is greatly feared by bankers, would be dismantled in 2018. It seems Aso believes loosening regulation will help stimulate lending and hence economic growth. To us it smacks of desperation. 

Finally, each year seemingly brings a new Aso gaffe. Last year he was quoted as saying that “Hitler, who killed millions of people, was no good, even if his motives were right.” The comment prompted a global backlash.

Under his watch the MoF admitted mid-March that its bureaucrats had tampered with official records of a state-owned land sale at a deeply discounted price to a school operator, Moritomo Gakuen, linked to Abe's wife. Aso has missed the G-20 meeting in Buenos Aires to try and stem the fallout from the scandal.

In a poll conducted by newspaper Sankei 71% of respondents said Aso should resign.

Aso has been in power since 2012. As we said last year, it's time for Aso to fall on his sword.

Aso ranks ahead only of Hong Kong's Paul ChanMalaysia's Najib Razak and Taiwan's Sheu Yu-jer.


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