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Want to see Japan’s future? Look past Shinzo Abe’s immediate successor, economist says

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Shinzo Abe, the longest-serving Japanese Prime Minister, announced his resignation on Friday, citing ill health.

Abe’s sudden decision to stand down was a shock, but his successor is unlikely to be a disruptor, says Jesper Koll, a Japan-based economist and senior adviser for WisdomTree Investments. All the contenders to lead Japan next have policy outlooks similar to Abe’s, Koll said, and whoever gets the nod is unlikely to be in power long.

Abe’s immediate successor will not be selected by Japanese voters or decided by the Diet, the country’s parliament. Instead, Abe’s ruling Liberal Democratic Party (LDP) will decide. Abe is expected to continue his duties until LDP votes on the new leader.

“In my personal opinion, whoever is going to run the country is going to be relatively short-lived because there is a younger generation of LDP politicians” that could lead to “real change” when its members are ushered in in the next election, Koll said. That “structural change” will introduce “real forward-looking policies,” he said.

In an Eastworld Spotlight conversation with Fortune‘s Clay Chandler this week, Koll talked about Abe’s potential successors, the prime minister’s legacy, and the country’s short-term economic outlook.  The conversation below has been edited for length and clarity.

Fortune: Were you caught off-guard by the announcement last week that Abe would resign? 

Jesper Koll: There’s no question that the timing was a big surprise. Prime Minister Abe himself had become a little bit of a “lame-duck” over the last four or five months. He seemed to have lost his mojo not just because of the complications of a policy force by the COVID, but really in terms of having forward-looking visions. So yes, it’s a surprise. But… after basically eight years in power, we knew he was going to leave anyways at some point over the next 12 months. And it leaves the LDP in a very interesting position. Because after eight years of a very strong grip on power that Prime Minister Abe had, now it’s back to the old work of smoky backroom dealings trying to pick a successor.

Looking back at Abe’s legacy and what he’s accomplished, do you consider him one of Japan’s better prime ministers?

Absolutely. I think he’s done a tremendous amount of good in Japan not just by the stability and the consistency of the grip of power, but by really… the coordination. And that’s where Prime Minister Abe was unbelievably strong. His group of basically 12 core ministers, which he kept very, very consistent over the last eight years, ruled Japan with an iron grip, extremely coordinated. Whether it’s the monetary and fiscal policy, or whether it is the regulatory policy, whether it’s the coordination with the business community, even the coordination with the GPIF, the Government Pension [Investment] Fund…unbelievably powerful and well coordinated grip on power.

Abe has introduced reforms to make Japanese companies more competitive—in particular, to fix the problem of a shrinking and aging labor force—and to get more women into the workforce. How has he done on that?

I think the answer is it’s a work in progress. If you look at the female participation rate in Japan, it’s now surged above that of the United States and even some of the Scandinavian countries. Having a genuine conversation about female empowerment before Prime Minister Abe was basically impossible in Japan, now even the most established and conservative companies are engaging in this structural reform. When you look at foreign labor, the number of foreign workers in Japan has basically doubled during Abe’s tenure. It’s still relatively low compared to some European countries or the United States, but the overall mindset that has been engineered, I think, is actually a very powerful one.

There’s a crowded field of Abe successors. Do you have a sense of which process they’ll take to choose a successor?

What’s important is that, actually, the candidates are very similar. Of the current candidates who’ve raised their hands, if you ask me what’s the difference in terms of the policy outlook, it’s splitting hairs trying to come up with one. It’s about personality, it’s not about policy.

The interesting thing is that—in my opinion—whoever is going to run the country is going to be relatively short-lived, because there is a younger generation of LDP politicians. For example, the current Defense Minister [Taro] Kono, who is Georgetown-educated, is a very global person. He’s definitely a contender not this time around, but the next time around, really sort of leading Japan into the future. It’s not the immediate successor but the one afterwards; that’s when Japan is going to get interesting again, because the generational change actually happens.

Prime Minister Abe has been around for eight years, there’s a lot of people inside the LDP who feel entitled; [that] they are in line for the job. The real issue is switching the generations into people who are in their 40s and 50s. If you get that structural change, that’s when you’ve got a likelihood of real restructuring, of real forward-looking policies coming. I think it will happen in the LDP but not this time around, but the one afterwards.

There could be some dramatic changes in the nature of the U.S.-Japan relationship depending on the outcome of the U.S. presidential election in November. What are the scenarios you see for that?

I think from a Japanese perspective, a victory of a Democratic candidate opens the door for greater multilateral activity. And as you know, Japan has been pushing for a multilateral approach particularly here in Asia. From that perspective, a democratic victory would be a little easier for the Japanese to handle, rather than the sort of unilateral, slightly erratic, and personality-driven policy that you’ve got under the current president in the United States.

One of the real hidden and unfortunately not enough discussed legacies of Prime Minister Abe is the relationship between Japan and India, because look at an Asian map, and you say, ‘fine, so there is something happening with the People’s Republic of China, how do we deal with that?’ It’s very obvious that Japan on the one side of the Pacific and India on the other side…if you have close relations between those two countries, you’ve got a pretty powerful containment mechanism that kicks into place. And so in my opinion, the real question about the Abe legacy is not the U.S.-Japan relationship, [which] is so dense at so many levels that it doesn’t really matter. However, the relationship between Japan and India is a relatively new one…it was Abe’s initiative, his rapport with Prime Minister Modi that made it happen.

One big part of his legacy is that certainly for the first six years of his reign, once a month he was outside of Japan, promoting Japan. He wasn’t just sort of going for cocktail parties. He came, armed with business people. They had an industrial policy to promote Japan, in particular the ASEAN world, but also in the Middle East and to some extent even in Africa.

What’s your outlook for Japan throughout the rest of the year?

Unlike many Western or advanced industrial economies, Japan doesn’t really have a big employment shock. I mean the unemployment rate has risen from about 2.2% to 2.9%. But for all intents and purposes, the structural shortage of labor is actually a positive in this respect, so that companies are not hiring and firing.

In addition, you find that business investment expenditure moving towards better capital, to more productive technology is deeply entrenched amongst corporations. As a result of that, after this volatility that we had in the first half of this year, you’re looking at a Japanese economy that’s growing at around 1.5%.

This story is part of Eastworld Spotlight, a series of conversations on matters of business, tech, and finance with executives, experts, entrepreneurs, and investors in Asia. Subscribe to Fortune’s Eastworld newsletter to get them in your inbox.

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