Japan Politics October 2017

Japan

Japan: Abe cements his grip on power in snap election

October 23, 2017

Prime Minister Shinzo Abe will be able to continue with the implementation of his economic policies, dubbed Abenomics, for an additional four years following his landslide victory in the snap 22 October general election. The current coalition government formed by Abe’s Liberal Democratic Party (LDP) and the Komeito party, the junior coalition partner, managed to soundly uphold a two-thirds supermajority, which would allow Abe to revise the country’s pacifist constitution. Abe will likely also reappoint Haruhiko Kuroda, the current Bank of Japan Governor, for another five-year term in April. Kuroda has been one of the prime minister’s main allies and has adopted an aggressive monetary policy stance in order to pull the country out of what he called “deflationary mindset”. While Abenomics succeeded in boosting economic growth, inflation is the main challenge as it remains stubbornly low.

In the economic arena, Abe will continue with his reflationary policies, known as the “three arrows”, consisting of bold fiscal spending, an ultra-loose monetary policy and structural reforms. Room for additional fiscal and monetary stimuli appears to be limited as the country’s public debt is well above 200% of GDP and the Central Bank has already adopted an unprecedented monetary expansion, so Abe will have to focus on structural reforms. A deep overhaul of the labor market will top the agenda. Although the unemployment rate is sitting at an over two-decade low, wage gains remain meagre, and the country is struggling with a rapidly aging workforce. Moreover, Abe will go ahead with the planned sales tax hike from 8% to 10% in October 2019 in order to boost spending in child care and education. While this measure could endanger the economic recovery, Abe argues that it will help to tackle the government’s fiscal imbalances.

Abe’s strong mandate will likely prompt an overhaul of the country’s post-war constitution in order to allow Japan to build up its offensive military capabilities amid rising threats from North Korea. While he has the two-thirds majority to revise the controversial Article 9, which outlaws war, the reform will also need to be approved by the population in a national referendum. The latest polls signal that voters are split on revising the pacifist character of the constitution. A resurgence of Japan as a military power would add fuel to an already tense region.

With this victory, Abe will strengthen his position at the helm of the LDP, and he will likely opt for an unusual third consecutive three-year term in the internal party leadership election next year. If he continues in office until 2021, he will become the longest-serving prime minister since Japan adopted a parliamentary system in the 1880s. Abe’s policies have led to Japan boosting its nominal GDP in recent years, and his reelection will put the country’s nominal output on track to meet the JPY 600 trillion target set for FY 2020. However, inflation has proved difficult to boost and the 2% target still seems to be a difficult objective in the short and mid-term. Moreover, some risks threaten to derail Japan’s nascent economic recovery: Geopolitical tensions could lead capital to move to safe-haven assets such as the yen, hurting the external sector. Moreover, poor wage gains and spillovers stemming from the rapidly ageing population will continue to put a dent in Japan’s long-term growth trajectory.


Author: Ricard Torné, Lead Economist

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