Post on 10-Apr-2023
Running head: JAPAN REFORMS Kennedy
Explaining Japanese Economic Reforms: Past and Present
Trevor Kennedy
POLI 513A
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Introduction
In the past quarter century, Japan has undergone some
significant structural changes, departing from the postwar
status quo, in which bureaucrats wielded great power,
imports were heavily restricted, the government owned many
Special Public Corporations (SPC), and many sectors of the
economy were protected, towards a system that accommodates
an economy that is “free, fair, and global.” (Dore, 1999)
The liberalization of the Japanese economy has been a slow,
but constant process, delayed only by minor political
disruptions or other unforeseen events. While some elites
have long advocated for a push towards liberalization, many
Japanese have remained opposed to the dismantling of the
postwar CME model, in which inequality was low, employment—
for men—was often for life, and where the social fabric was
perceivably strong. This paper will address the question,
why has Japan continued to move towards the LME system, when
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many Japanese are/were opposed? Furthermore, this paper will
focus heavily on the second tenure of Abe Shinzo and his
Abenomics polices, to test if his policies fit within the
framework of a larger trend towards liberalization, and his
initiatives enjoy more public support than previous moves
towards liberalization.
What is the Japanese Model?
During the boom years of the postwar period, the
Liberal Democratic Party, various ministries, and business
interests controlled the reigns of power, in an arrangement
coined by Chalmers Johnson as the “Iron-Triangle” in his
seminal book MITI and the Japanese Miracle: The Growth of Industrial Policy
in 1982. Additionally, the Japanese economy benefitted
greatly from the era of the Yoshida Doctrine, during which
time, Japan focused its national resources on economic
growth. This period of rapid growth was enabled by an import
substitution industrialization (ISI) policy. However, unlike
most ISI nations, Japan had virtually unrestricted market
access to the American market, without having to allow
American firms equal access to its own market. Kent Calder
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believes that “America accorded Japan unusually favourable
(and highly asymmetrical)” (2004) economic benefits because
it was a member of the San Francisco System.
As the Japanese economy began to catch up to the United
States, the justification for a continued asymmetrical
arrangement between the United States and Japan decreased.
Previously, the United States accepted an uneven economic
relationship in favour of boosting Japan as a regional
bulwark against Soviet influence. Michael Auslin explains
that after Japan regained its independence with the San
Francisco Peace Treaty, it “immediately became America’s linchpin
in the Pacific, a position to which Japan’s leadership
acquiesced” (2012, pg. 237) out of economic and security
interests. As concerns over the capability of the Soviet
Union waned, and China became an American ally, the United
States began to pressure Japan into opening up its economy
and follow Western economic norms.
American politicians also came under sustained pressure
from interest groups in the United States claiming that
Japan for one had too many restrictions to entering its
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market, two that its currency was undervalued, giving it an
unfair trade advantage, and three that Japanese firms were
protected and aided by the state, providing another unfair
advantage to manufactures in Japan. David Brock explained in
1989 that, “Japan-bashers stress that the Japanese
officially practice ‘adversarial trade’ - the phrase coined
by the economist Peter Drucker to describe conditions in
which one country uses trade barriers combined with policies
favouring certain industries to obtain advantages over a
trading partner.” (1989)
Popular media was rife with anti-Japanese sentiment, often
bashing the Japanese economic model as being predatory. One
famous example of Japan-bashing in American media came from
Theodore White of the New York Times. White published a
piece in 1985 titled The Danger From Japan. In his article,
White made a series of linkages to the risk that he believed
Japan would pose the United States if it continued along its
trajectory in the 1980s. White believed that:
American industry grew up in partnership with European industry. But Japan rouses different fears. Behind Japan (''the Big Dragon,'' some call it) march the ''four
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little dragons'' (Korea, Hong Kong, Taiwan, Singapore) following in its path. And behind loom China and India, desperate as they are to raise their standards of living - at the expense of American standards, if necessary. (1985)
White’s views merely reflected the popular opinion of many
Americans at the height of the Japanese miracle.
American diplomatic pressure, along with fears that
Japan-bashing would hurt Japanese economic interests,
provided a policy window for pro-reform politicians in Japan
to being making structural reforms towards a liberal market
economy.
Pressure to Change (Isomorphism)
Based on the aforementioned reasons, etc. Japan began a
process of restructuring, based on a LME model. Some believe
that Japan—for its own wellbeing—should have begun the
process of liberalization well before the bubble economy.
Richard Katz in Japanese Phoenix: The Long and Bumpy Road to Revival
argues that Japan “reached maturity in the mid-1970s,” and
from then onwards, “developmentalist policies should have
been loosened.” Conceivably, many in Japan felt the same
way. For example, Prime Minister Nakasone, with the support
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of Keidanren, privatized “Nippon Telephone and Telegraph
(NTT), Japan National Railways (JNR), and Japan Tobacco
(JT),” and also created “Management and Coordination Agency
(MCA, created by merging the Administrative Management
Agency with the Prime Minister's Office) in order to give
the prime minister greater power to oversee the
bureaucracy.” (Bevacqua, 1997) However, instead of viewing
the privatization as a genuine effort to liberalize the
economy, many pre-bubble reforms could also be interpreted
as efforts to consolidate the power of certain stakeholders—
in this case the Keidanren and the LDP.
When it comes to reforms that affect Japan’s economic
performance globally, it would appear that Japan was more
greatly pressured by external forces, than it was by
domestic forces. As mentioned above, the ending of the San
Francisco System, along with Japan-bashers influencing the
policy options of politicians in the United States, the US
began to pressure Japan to adopt norms relating to currency,
financial regulation, and corporate governance, in an effort
to eliminate any perceived unfair advantages that Japan
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enjoyed within the previous asymmetrical economic
arrangement.
One sociological phenomenon that can explain the
cognitive process that influenced the decision by Japanese
policymakers to adopt liberal polices, ending the prewar
economic status quo, is isomorphism. Paul J. DiMaggio and
Walter W. Powell explain isomorphism—in the context of
institutions—as the process of the “homogenization” (1983)
of norms and practices among peers. Within the Japanese
context, one can imagine the pressure for the Japanese to
homogenize their economic practices with other major
economies. However, there are different motivations to
homogenize in different circumstances. DiMaggio and Powel
separate isomorphism into three categories.
The first category was “mimetic” isomorphism. Mimetic
isomorphism emerges “from standard responses to
uncertainty.” One mimetic explanation could be that as the
economy matured, Japanese policy makers failed to identify
the next step of economic development. Out of uncertainty,
Japan followed a liberal agenda, by imitating the US.
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The second more probable reason for convergence is
coercive isomorphism. DiMaggio and Powel believe that
“coercive isomorphism results from both formal and informal
pressures exerted on organizations by other organizations
upon which they are dependent.” (1983) External pressure
from actors in which Japan was dependent resulted in a push
towards policy homogenization. Two notable cases in the
1980s were the “Foreign Exchange and Foreign Trade Control
Law in 1980” and more importantly, the “U.S.-Japan Yen
Dollar Agreement of 1984.” (Tiberghien, 2005) These reforms,
along with others edged on by external actors, are blamed
for some of Japan’s economic woes. Tiberghien argues in
Navigating the Path of Least Resistance: Financial Deregulation and the Origins
of the Japanese Crisis that, “the origins of the Japanese crisis
lie in the great bubble of 1985-1990 and that the bubble was
partly caused by an ill-supervised, externally induced
financial deregulation.”
The third force for regulatory homogenization is
normative isomorphism. DiMaggio and Powel consider the
third type of isomorphism as a consequence of
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“professionalism.” (1983) People-to-people exchanges,
particularly in academia, could be blamed in part for the
convergence of norms within certain professions. Ronald Dore
provides and explanation in Japan's Reform Debate: Patriotic Concern
or Class Interest? Or Both? that may help to explain why some
politicians, bureaucrats, and private interests pushed for a
homogenization for norms based on the American LME model.
Dore claims that, “over the decades, world cultural hegemony
has decisively shifted from Europe to the United States, it
is more exclusively the United States that has acquired the
authority of the teacher.” (1999) Contemporarily, the
influence from professionalism has never been stronger, as
many professionals received their training from some of the
same international institutions. As the power of the Prime
Minister’s Office has increased, and bureaucrats have taken
a backseat, there is increased influence from U.S.-trained
economists on the government to make policy changes. This
paper will discuss Abe in further detail later on, but in
short, during Abe’s second term in government his economic
policies have been heavily influenced by Hamada Koichi
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(Yale), and Yamamoto Kozo (Cornell), favouring a certain
variety of liberalization, with Honda Etsuro (Tokyo)—who is
influenced greatly by Paul Krugman (Princeton) favouring a
different variety. Both sets of actors, influenced by their
profession, encourage systematic change in the Japanese
economy.
A great deal of external pressure has been levied on
Japan since it began restructuring its economy in early
1980s. Politically, some areas have remained out of reach,
such as agriculture and pharmaceuticals. For example, Prime
Minister Hashimoto—despite his efforts on administrative
reform—protected agricultural interests, by sheltering
“special public corporations (SPCs) under the jurisdiction
of the Ministry of Agriculture.” (Bevacqua, 1997) Much of
the reason why areas like agriculture remained protected was
because the beneficiaries are politically invaluable to the
Liberal Democratic Party. In the past, voter disparities
between rural and urban voters ranged from “4.09 and 5.08”
(Iwakuni, 2012, pg. 119) in favour of rural voters.
Overtime, the maximum disparity has decreased due to
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judicial pressure, to “3.94 (1983), 3.18 (1993), and 2.30
(2011).” (Pg. 120) The protection of the agricultural
sector, but reform of other sectors, exemplifies both the
problems with Japan’s partial reform, and with Japanese
policymakers’ inaptitude in choosing winners and losers.
Katz insists, “Japan was being run on the principle of
comparative disadvantage. Because it protected glass and
rice and cement and steel, it drove away autos and
electronics.” (2003) While the public in many instances is
resistant to the direction that the government is moving the
economy, the government has been able to make piecemeal
reforms, so long as critical segments of the electoral
landscape are unaffected.
Reforms under Abe 2.0
Prime Minister Abe was elected for a second term of
office in December 2012, ending a short disruption in LDP
rule by the Democratic Party of Japan (DPJ). According to a
2013 Pew Research Centre poll titled Japanese Public’s Mood
Rebounding, Abe Highly Popular, “Prime Minister Abe” was “seen
favourably by 71% of the Japanese public, with no evident
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gender gap, generation gap, class difference or rural urban
split in his support.” (2013) The equal support was based on
the popular belief that Abe’s Abenomics polices would help
rejuvenate the lacklustre Japanese economy. High levels of
support for comprehensive economic reform are unusual, and
therefore provided Abe with a rare opportunity to make
various reforms to the Japanese economy. Abe outlined three
broad policy actions within the thematic framework of
Abenomics. The three policy areas of Abenomics are referred
to as the three arrows, based on a folktale from the Abe
family’s native Yamaguchi Prefecture. The moral of the tale
of the three arrows is that if all three are held at once,
no matter how hard one tries, they cannot be broken.
First Arrow (Stimulus)
The first arrow of Abenomics was based on a government
stimulus package. The Government of Japan 2013 report
Emergency Economic Measures for The Revitalization of the Japanese Economy
estimated that the stimulus would total 14 trillion yen.
According to James McBride and Beina Yu from the Council on
Foreign Relations, the actual amount of stimulus was closer
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to “20.2 trillion yen ($210 billion), of which 10.3 trillion
($116 billion) was direct government spending.” (2015) The
stimulus package was distributed into three categories of
spending with the intent of increasing real GDP by 2%. The
spending was earmarked for Tohoku reconstruction, social
welfare, and infrastructure. Both Tohoku reconstruction and
infrastructure spending were/are critically needed, but the
additional money dedicated to social spending merely
provided a temporary alleviation to budgetary spending
restraints. According to Gregory W. Noble, “by 2011 social
welfare accounted for over half of all policy spending.”
(2012, pg. 60) Social welfare’s proportion of government
spending at current levels is expected to grow by “one
percent of the budget” (2012, pg. 60) per year. Such
concessions by the government continue a long-term pattern
of pandering to gain electoral support. Abe, despite making
statements that he wants to achieve a balanced budget, is
wary of angering his base of government dependents. As
Grimes puts it, “There are no winners from deficit reduction
in the short run.” (2012, Pg. 96) Therefore, the benefits of
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the first arrow to the Japanese economy—in the long-term—are
negligible so long as unfunded liabilities continue to
mount.
Second Arrow (QE)
The second arrow of Abenomics began with the
replacement of Shirakawa Masaaki with Kuroda Haruhiko.
Kuroda was selected because of his support for aggressive
monetary policy based on Quantitative Easing (QE). Since
taking over as the Governor of the Bank of Japan (BOJ),
Kuroda has followed a mandate of “achieving price stability,
thereby contributing to the sound development of the
national economy.” (BOJ, 2013) The BOJ’s explanation of
price stability has been based on the objective of achieving
annual 2% core inflation. Kuroda’s BOJ is notable in regard
to Japan because unlike previous BOJ Governors, Kuroda has
committed to maintaining the existing policy until the
Japanese economy self sustains the 2% price stability
target, whereas previous governors had followed set
timelines for achieving their respective goals. According to
Martin Wolf in 2013, Kuroda planned to achieve his inflation
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targets by expanding the monetary base by “Y60tn-Y70tn
($600bn-$700bn or 13-15 per cent of gross domestic product)”
a year.
A residual benefit of the QE policy has been that it
has led to a decline in the value of the yen, improving
Japanese competiveness overseas. It has also greatly
increased the amount of corporate earnings that are
repatriated from overseas markets. Toyota, for example,
recorded its best year of corporate earnings in 2014, with
an “operating profit of ¥2.7 trillion ($23.0 billion) in the
fiscal year ending in March, up 17.8% from a year earlier.”
(Kubota, 2014) Other companies have likewise benefited from
a weak yen.
In 2013, Wolf reported that Japanese companies were
sitting on the equivalent of “29.5 per cent of GDP in 2011”
in retained earnings. In 2014, this number swelled to “44%
of GDP.” (Economist, 2014) This dilemma has posed problems
for Abe, because to achieve his inflation targets and to
keep the Japanese public onboard with his economic plans, he
needs corporate Japan to offload some of that money in the
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form of increased wages. So far, efforts by the Abe
Government partially succeeded by encouraging “some large
companies to raise base wages modestly in the spring of
2014. However, many smaller companies didn’t follow suit.”
(Sekiguchi, Warnock, 2014) Wages will need to increase
across the board to make up for the loss in household
earnings posed by the BOJ’s inflationary policies and by
Abe’s decision to proceed with a 3% increase in the
consumption tax rate in April 2014.
Another major obstacle that Abe faces by accomplishing
sustained inflation is how to change consumer behaviours.
Tabuchi Hiroko of the New York Times reported that, among
the general population—particularly those who started
working after the bubble burst, “the entrenched attitudes
and behaviours in the country” follow a “deflation mind-
set.” In other words, people are used to prices falling, or
staying the same over a long period of time. For example:
The Big Mac still costs about the same here as it did in 1998: about 300 yen, or almost $3. The price of another popular fast food offering — the beef-and- rice bowl from the Yoshinoya restaurant chain — has fallen from 400 yen in
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the late 1990s to 280 yen today. During that time, average worker incomes have also fallen. (Tabuchi, 2014)
The recent increase in prices will take time for inflation
wary consumers to adjust to.
On the bright side, after the implementation of the
second arrow, the Japanese Stock Exchange (JSE) has risen
dramatically. In 2014 alone, the “Nikkei achieved a
multiyear high of 17,935 yen on December 8, up from a 2014
low of 13,901.” (Harner, 2014) Before Abe took office, the
index was significantly lower. While the recent bullishness
of the Japanese stock market cannot credit the BOJ’s QE
policies alone, it has certainly been a factor and a clear
area of success for the Prime Minister.
Third Arrow (Reforms)
The third arrow of Abenomics is a more complicated
matter than the former two arrows because it lacks a
coherent definition. The Asian Develop Bank has described
the third arrow as, “structural reforms to boost Japan’s
competitiveness and economic growth.” (Yoshino and
Taghizadeh-Hesary, 2014) To Hamada Koichi, Abe’s third arrow
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means, “reform of the labour market, deregulation, and a
reduction in the corporate-tax rate.” (2014) More recently
however, the government has identified reforms to the
agricultural sector, by decentralizing the “Central Union of
Agricultural Cooperatives,” (2015) ending the rice
production adjustment program, by encouraging land
consolidation, and by slightly easing the American rice
import quota to “50,000 tonnes a year,” (Kajimoto, 2015) as
a priority.
The government has also expressed interest in
reforming the medical sector, but the government backtracked
on plans in 2013 to allow online pharmaceutical sales. This
decision drew criticism from Mikitani Hiroshi, the CEO of
Rakuten. Mikitani argued that “if Mr. Abe cannot decide on
this, he cannot decide on anything,” (McLannahan, Soble,
2013) foreshadowing Abe’s reluctance to displease interest
groups in the future. However, Abe may take a more
aggressive approach to deregulation in the future if he can
survive the displeasure of the medical industry.
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Another experiment that Abe has embarked upon is in the
creation of National Special Strategic Zones. To date, the
Japanese government has identified 5 zones in Yabu, Hyogo;
Fukuoka City, Fukuoka; “Kansai area;” “Tokyo area;” and
Niigata City, Niigata. Each zone will serve different
purposes, with the intent that that they will enable the
government to experiment with new polices. The Economist
took a pessimistic stance on this initiative by stating
that, “there are legitimate worries that Japan’s new zones
will fail because central-government officials reject ideas
for deregulation for fear of offending vested interests.”
(2015) However, it is worth noting that Abe’s designated
zones may serve many vested interests in a productive way.
For example, the Kansai region experienced a political
upheaval with the rise of the Japanese Restoration Party.
The party has since fallen into relative obscurity, but its
central tenants remain popular among Kansai voters. That is,
the desire to gain increased regional autonomy, which could
be enabled with the Kansai-based zone.
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The next identified target of Abenomics’ third arrow is
to achieve a greater number of women in the fulltime
workforce. Abe has good economic reason to make an effort.
According to Kathy Mitsui of Goldman Sachs Japan, “by
closing the gender employment gap (as of 2013), we estimate
the potential boost to Japan’s GDP could be nearly 13%.”
(2014) More women working would also alleviate some of the
pressure of a declining workforce and maximize the output of
many educated women relegated to housework or part-time
labour after their first child.
Much in line with the above reform, Abe has been
overhauling Japan’s immigration system to offset a decline
in the workforce. The government has decreased the time
needed to obtain a permanent residency status for skilled
workers to 3 years. The government has further plans to
increase the quota of foreign workers in japan, along with
an expansion of the permitted professions allowed to work in
Japan. The government also plans to create a “new type of
residence status with an unlimited period of stay.” (2015)
It is unclear if the population will support such an
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initiative. However, there is reason to be optimistic; Japan
ranks very highly on the World Values Survey for its level
of racial tolerance (Fisher, 2013). This sentiment echoes
Kim Mikyoung’s belief that Japanese civil society is
generally accepting of multiculturalism. According to Kim,
“civil society has embraced multicultural coexistence
(tabunka kyosei), the government, business elites, and
journalists tend to maintain the myth of Japan’s uniqueness
of Japan’s uniqueness and homogeneity.” (2012, pg. 173) If
this is the case, it could be a positive move to see the
three former groups change their stance on multiculturalism
out of economic necessity.
Finally, Abe is embarking on a mission to abolish trade
barriers for Japanese goods, also opening up Japan to
cheaper imports. The forthcoming Trans-Pacific Partnership
(TPP) free trade agreement would open up the United States,
Canada, Australia, etc. to Japanese goods. Politically, the
TPP is a contentious issue. It has widespread support from
the Keidanren, but is adamantly opposed by Japan
Agricultural Zenchu and other sectorial interest groups.
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According to an Asahi Shimbun poll from 2013, “Fifty-three
percent of voters support Japan’s participation in the
Trans-Pacific Partnership.” (2013) However, as mentioned
before, rural voters are disproportionally powerful. Still,
instead of bowing to the short-term interests of rural
voters, etc. the TPP may provide more numerous benefits to
the Japanese economy in the long run.
T.J Pempel argues in favour of the TPP and other major
reforms:
The Japanese political system, which has impeded efforts to adjust to the country’s long-term economic slide, would benefit from a bold shock sufficiently powerful to break the stifling lock these groups now hold. Only after the resistance has been effectively defeatedwill Japanese politics be able to embrace economic policies that will address Japan’s long-term loss of
competitiveness and help restore long-term dynamism to the country. The TPP represents one such potential jolt.(2012, pg. 259)
Then again, if the Japanese people disagree with the terms
of the TPP, or if the TPP is watered down so significantly
that the final agreement is insignificant, it will become an
economic panacea.
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For economic reasons, Japan should seriously consider
the merits of the TPP. For one, lower import tariffs could
save Japanese shoppers, in effect, increasing their
purchasing power. For exporters, the TPP would be a clear
boost. Comparatively, Japan fares much worse than its
regional peers when it comes to trade with FTA nations.
Pempel references John Ravenhill’s research which finds
that, “Only 14 percent of Japan’s exports are covered by
existing FTAs (or EPAs), compared to 56 percent for ASEAN,
45 percent for Hong Kong, 25 percent for China, and 28
percent for South Korea.” (2012, pg. 266) So long as
Japanese goods face higher tariffs, exporters will
endemically be disadvantaged in the international market.
Conclusion
In past 30 years, Japan has undergone significant
changes to its economy, its administration, and its
political system. Many of these changes have been encouraged
by necessity, or by opportunity, depending on the vantage
point. According to Leonard J. Schoppa:
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Social norms reinforced what was for many a financial necessity. In contrast, today many parents earn wages generous enough to support or subsidize adult
children who remain at home. Fewer sons or daughters face financial pressure to marry, and some do not even feel much obligation to go to work. Social norms have changed too, with the Japanese becoming much more
tolerant of women marrying later or not at all. These shifts have opened up previously nonexistent exit opportunities for young people who want to postpone or optout of marriage or parenthood. (2001)
As society has changed, so have people’s expectations. The
forces that once created policy rigidity have gradually
fallen to the wayside. Likewise, the agents that influence
policy have changed as well. Different ministries are
elevated, and with less power than before; the gap between
rural and urban voters has closed, and politicians have more
control over policy than in past. The changes coming from
the Abe government—unlike by previous governments—enjoy
public support. That does not mean that every policy
proposed and implemented is popular. Abe’s policy agenda has
frustrated technocrats who wished to see rapid economic
change—particularly in regards to the third arrow. He has
also irritated entrenched sectorial interests that are more
favourable to the status quo. For better or worse, Abe must
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proceed gradually, making changes as they become politically
palatable.
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