Why, Abe?

Shinzo Abe is a smart man and savvy politician.  He has the rare honor of being Japan's prime minister twice.  He is celebrating his first year of his second (non-consecutive) term in office.  In fact, it is on that very anniversary that he chose to visit the Yasukuni Shrine.  

The shrine itself dates back to the late 19th century and honors 2.4 mln, but it is only 14 that are the source of the controversy.  They were judged Class A war criminals at Nuremberg.   

High level official visits, especially by the prime minister, have in the past antagonized China and South Korea, and has clearly done so again.  Abe is the first Japanese Prime Minister to do so since 2006.  For the record, it also displeases the US, which noted that Abe's actions will exacerbate tensions with its neighbors.   

Abe tried to soften the blow.  He tried explaining that he was not honoring war criminals, but praying for the souls of the war dead.  Such a message no doubt fell on deaf ears.  Often, we dismiss things, saying they are just symbolic.  Yet, sometimes symbols are important and this is one of those times.  Japan alone does not determine the significance of the symbol.   Suggesting that the symbol should not be imbued with such significance is beside the point.  

This is pretty elementary stuff.  Abe was not being tone deaf.  It was not accident, but a calculated move.  Abe knew what he was doing.  On one hand, he is not going to lose anything he had. Specifically, both the Chinese and South Korean leadership have rebuffed Abe's efforts to hold bilateral talks.   Nor will the US, which has been urging Abe to adopt a more cautious approach in addressing the territorial disputes, abandon Japan.  In fact, it appears that Abe is about to resolve the two-decade old controversy over the US base in Okinawa.  

Even if does not lose anything, what is there to gain from visiting the Yasukuni Shrine?  There is no pressure from the electoral cycle, where the next general election does not need to be called until late 2016.   His popularity has slipped as the year winds down.  The tougher laws defending state secrecy were not very popular, though this must have also been well known by Abe and his advisers.  This suggests that short-term popularity may not be a key motivation here.  It is not clear that visiting the war shrine will give him a sustained bump in the polls, and even if it does, not what end ?

Abstracting from the immediate context, it may be similar to the message Israel send by building new settlements.  It tells its adversaries (and friends) that they, and not the US, determine the way in which their national interest will be defended and projected.  Do not see us as simply as "client state", both actions cry.  

Abe's shrine visit threaten to overshadow the good news that is likely to be announced on December 27.  Core consumer prices are likely to rise above 1% for the first time in five years. The Bank of Japan is half way to its target, though we suspect that the first half will prove to have been easier than the second half.    Core inflation excludes fresh food in Japan.  If one were to exclude both food and energy, consumer prices have also turned positive for the first time since 2008.  

Japan is also expected to report a slight decline in in the unemployment rate to 3.9% and the jobs-to-application ration is at multi-year highs.  Household spending and retail sales may be boosted as consumers begin anticipating the hike in the retail sales tax on April 1.  Some economists are linking the strong gains in housing starts to the pending tax increase as well, though this may be a bit of a stretch.  Housing starts rose in November for the sixteenth consecutive month.  Separately, industrial production is expected to have risen in November.  

With Japanese stocks continuing to rally and the yen trending lower after a period of consolidation in Q3, business sentiment at multi-year highs, Abe's economic stewardship has generally been praised.  We remain concerned that the household sector is being squeezed on three-fronts.  First, the end of deflation means that they are experiencing negative real returns on their savings, the bulk of which, for numerous cultural and institutional reasons, remains largely in low (nominal) yielding savings accounts.  Second, underlying wages (not including bonuses or over-time pay) are also not keeping pace with inflation.  Third, the purchases will be taxed at an 8% rate instead of 5%.  

Abe's nationalistic political agenda has been the background in his first year, even though the defense budget was increased for the first time in several years.  The trigger of the intensification of the island dispute with China began prior to Abe's election.   The shrine visit could be a signal that with Abenomics well underway, it is time for the other half of the agenda.   The rebuff from South Korea and China may have hardened Abe's resolve.  

Now attention will shift to the response, especially by China.  There is some concern that China was retaliate on trade issues, as it has done in the past.  There are non-economic consequences as well.  Japan does not only have a territorial dispute with China, but also with South Korea.   This disputes become increasingly intractable.  One does not have to accept the parallels some try to draw, between the current geopolitical situation and 1914, to see it as difficult for any side to back down for both domestic and international considerations.    

It is ironic that the following day Abe's shrine visit, China celebrated the 120th anniversary of Mao's birth (December 26). The celebrations, we should hastily add, were reportedly scaled back on orders from Beijing, which has reduced the ostentatious nature of Communist Party officials, in an effort to reform and reduce the gulf that had been perceived widening between the CCP and the Chinese people.  

President Xi Jinping both celebrated Mao's achievements, but also argued against the cult-of-personality that surrounds Mao, noting that "revolutionary leaders are not gods, but human beings and cannot be worshipped as gods."   He struck a carefully chosen balance between honoring Mao and defending the right to build his effort and correct his mistakes.   Western historians estimate that some 45 mln Chinese people died due to the famine that resulted from government policies, and the chaos of the Cultural Revolution.