The first year of Shinzo Abe's second term as Japan's prime minister was a domestic political triumph, but his country has paid an enormously high price for it in its long-term economic policy and standing in Northeast Asia. Prospects for peaceful cooperation and understanding in the region have taken a battering which will take years to repair.

In domestic politics, Abe broke the curse of every failed, toothless prime minister since Junichiro Koizumi retired after a full five-year term back in 2009. Abe won a successful Upper House election, restoring his long-moribund Liberal Democratic Party to a commanding majority there for the first time since 2007. His stimulus spending policies have given a short-term and badly needed boost to the Japanese economy. And Japan's success in winning the main 2020 Summer Olympic Games for Tokyo has restored a swagger and confidence to his people they had not experienced since the start of their long economic stagnation a quarter century ago.

However, these successes have come at a fearful price, both domestically and economically. Abe's deficit-stimulus spending program recalls the reckless policies that drove Britain to ruin in the 1960s and 1970s under the long-discredited governments of Harold Wilson and Edward Heath.

On Dec 21, Abe won the approval of his LDP and New Komeito coalition government ministers for a record 95.88 trillion yen ($918.2 billion) budget for the coming fiscal year starting on April 1, 2014. It will boost spending on social security, defense and public works. At the same time, Abe remains publicly confident he can slash Japan's more than $10 trillion public debt, which is more than 200 percent the country's $5 trillion annual GDP, by far the highest burden of any nation in the industrialized world.

For all his promises to magically cut government spending, Abe in his first year was notorious for taking no tough decisions on economic restructuring or cost-cutting whatsoever. Instead, the government budget deficit rose in November 2013 by 35.1 percent compared with the same month in 2012 to a 1.29 trillion yen ($12.6 billion) deficit, the worst result ever for November and the 17th straight month of deficit.

Now Japan's headstrong, hard-charging prime minister is about to implement the "third arrow" of his Abenomics strategy - his economic restructuring program. If he is serious about this, it will badly hurt vested interests who have long supported his LDP and erode the popular support he has enjoyed. Yet Abe has only succeeded so far because of the short-term recovery under the stimulus of his big spending, not because of his hawkish stance.

Abe's neo-nationalistic policies have proven catastrophic for Japan with its two closest and most important neighbors, China and South Korea. Nearly 70 years after the end of World War II, he has single-handedly fanned fears of another era of Japanese expansion in both Beijing and Seoul.

This is an extraordinarily reckless and harmful "achievement." Because of Abe's diplomatic and military policies, not only have Sino-Japanese relations gone from bad to worse, but the drift between Japan and South Korea has widened. It is widely expected Abe may visit Yasukuni Shrine on Dec 26. That would once again sour Japan's ties with the countries it invaded in the past.

For all his rhetoric about providing leadership, Abe's first year in power was defined by a total failure to do so in economic affairs and foreign policy. He has yet to prove he is serious about taming the horrendous public deficit which threatens not only Japan but the entire world. And he continues to court the support of fringe extreme nationalistic elements at home. He has not shown statesmanship and leadership in telling his supporters why Japan cannot ignore the concerns of its neighbors and deny its own terrible history.

It is not too late for Japan or its leader. Abe could take a New Year's resolution to make his second year in office far different from his first. He could use his secure majority in both houses of parliament to finally attack the public debt mountain and cut it down to size. He could courageously slash government spending.

In foreign affairs, Abe could abandon his rhetoric of self-righteous denial about past war crimes and apologize for them instead. Japan needs China's booming market to maintain its own export strength. And it needs to peacefully and amicably resolve its bitter dispute with China over the Diaoyu Islands. Abe could learn a valuable lesson from South Korea's President Park Geun-hye who paid a successful visit to Beijing in June 2013.

Taking these steps will require character and courage. Japan's neighbors hope its leader will be worthy of the challenge.

The author is chief global analyst for The Globalist and a senior fellow of the American University in Moscow. He is the author of Shifting Superpowers: The New and Emerging Relationship between the United States, China and India.

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