Japanese voters have granted Prime Minister Shinzo Abe a mandate for further economic reform by handing his ruling coalition a sweeping election victory. With around two years left in office, can the reformist leader deliver on the promises of Abenomics?
On Sunday, the ruling coalition won a landslide in the nation’s upper house poll, with Abe’s Liberal Democratic Party (LDP) and junior coalition partner New Komeito securing 70 of 121 seats available in the 242-seat chamber. Together with other minor parties and unaffiliated lawmakers, Abe’s coalition now has a two-thirds majority in both the upper and lower houses, giving it the necessary votes to pursue constitutional change.
However, as noted by The Diplomat, the focus of the campaign was squarely on the economy, with the LDP campaigning on its achievements including the nation’s lowest jobless rate in nearly two decades, record corporate profits and higher wages.
At 3.2 percent, Japan’s jobless rate is currently among the lowest in the OECD, while last year’s first rise in commercial land prices in eight years has shown the effects of Abenomics’ reflationary measures.
Speaking to reporters Monday, the prime minister and LDP president said he had secured a new mandate for his Abenomics policies, comprising the “three arrows” of fiscal, monetary and pro-growth structural reforms.
“With an even stronger political base, we can and must push forward our economic and diplomatic policies even more aggressively. That’s the way to respond to the mandate the public gave us in this upper house election,” Abe said.
He added: “I decided to delay the consumption tax hike because Japan needs to kick into high gear to get out of deflation as fast as possible. Britain voted to exit the European Union and emerging economies are showing signs of deflation, therefore Japan must boost domestic demand.
“I’m committed to pushing forward comprehensive and bold economic measures to do that. I want the measures to be a powerful new start from here on. The key term is investment in the future.”
Abe pointed to further investments in student loans and scholarships, new investment in tourism infrastructure such as “Shinkansen” bullet trains, and other measures such as boosting labor force participation, promoting agricultural exports and easing smaller companies’ access to funding, while speeding up reconstruction efforts in disaster-hit areas such as Kumamoto.
Asked about constitutional reform, he said any amendments to the document that has stood unchanged since 1947 would need “thorough debate” in Diet committees.
Sadayuki Sakakibara, chairman of the Japan Business Federation (Keidanren), said Japanese had voted for a stable political environment to continue Abenomics.
“The top priority going forward is ending deflation and revitalizing the economy. To accomplish this, it’s essential that the government expand personal consumption and investment, and promote deregulation,” he said.
Yoshimitsu Kobayashi, chairman of the Japan Association of Corporate Executives, said the government should focus on fiscal health and regulatory reform in labor and other areas to create new industries.
Tokyo-based entrepreneur Ko Nagata, managing director of the Global Sky Group, said Japan’s business sector was hoping for further reforms to reinvigorate the world’s third-biggest economy.
“Japan needs more fiscal and monetary stimulus to increase domestic demand and get consumers spending again, since consumers are the driving force in the domestic economy. The corporate tax cuts are a good step also in encouraging businesses to invest more and create new jobs.
“Looking at structural reform, more pro-growth measures are required such as encouraging more female and elderly workers to join the workforce, lowering trade barriers under the TPP to spur competition and opening up more deregulatory zones across the country, as well as supporting the growth of the domestic venture capital industry to help entrepreneurs develop new businesses and industries.”
Nagata also pointed to the benefit of expanding inbound tourism, since “tourists will purchase Japanese products and services, thereby simultaneously boosting employment and production. This cycle is very important.”
Abe’s government is expected to launch a new fiscal stimulus package in early August of more than 10 trillion yen ($98 billion) to bolster an economy that has struggled to emerge from deflation. While gross domestic product expanded by an annualized 1.9 percent in the March quarter, GDP has contracted in five of the past 10 quarters.
Both the International Monetary Fund (IMF) and the World Bank expect Japan’s economy to expand by only 0.5 percent in 2016 – the same rate as last year – while the OECD has projected a slightly higher 0.7 percent GDP rise.
“If Abe has not tackled serious business deregulation and microeconomic reform by now – four years in office with this administration – it is unlikely that he will do it in his remaining time in power,” Devin Stewart, senior fellow, Carnegie Council, told The Diplomat.
“Abe framed this election as a referendum on Abenomics while the opposition warned the voters that Abe’s underlying motivation is a constitutional amendment to Article 9 (the peace article). There was little substantive debate about policy before this election, so Abe is free to frame his mandate whichever way he wants, and there are some signs that he will indeed take the vote as a green light to introduce a referendum on constitutional revision eventually.
“He might eventually succeed in getting a referendum out, adding to the global tide toward populism lately, but the polls suggest that the Japanese people will not choose a revision, thereby avoiding any concerns about a dramatic shift in the balance of power in Asia.”
No Time To Quit
Naoki Kamiyama, chief strategist at Nikko Asset Management, said Japan’s economy would struggle to further revive without a pickup in global demand.
“Weakness in the global economy, particularly the U.S. and China, has led to a rise in the yen (as a safe-haven currency) and, consequently, to weaker exports. This has forced the BoJ [Bank of Japan] to adopt a negative interest rate policy in attempt to combat these global headwinds,” he wrote.
“Unfortunately for Japan, the yen continued to strengthen due to a weakening U.S. dollar as markets became less certain of the Fed’s rate rise trajectory. This has led to increasing scepticism over Abenomics and has led some to denounce it as a failure.
“However, in our view, this is not the time to give up on Abenomics. In fact, the current market environment only reinforces the case for it.”
Kamiyama cited comments by the IMF’s David Lipton, who recently said the “three arrows remain the right arrows” although they needed to be launched with more force.
The “weakness and fragility of the global economy makes a strengthened Abenomics more necessary, not less necessary. They need to double down. If monetary policy is less effective than it used to be you have to do more of it,” Lipton said.
Kamiyama said he expected the Bank of Japan to cut rates “further into negative territory,” while a new fiscal stimulus of anything more than 5 trillion yen “would be a positive surprise for the market.”
“However, our view remains that a stronger US dollar and normalization of the global economy post-global financial crisis are key trends for the next few years, which will have positive implications for Japanese exporters, inflation and the outcomes of Abenomics,” he added.
Reform Steps
Jesper Koll, chief executive of WisdomTree Japan, has suggested that the election result has made “Team Abe” the “undisputed power champion amongst democratically elected global leaders.”
“If, as I expect, ‘Team Abe’ demonstrates strong economic policy leadership credentials in the coming three-four months, a ‘Japan premium’ should start to develop in Japanese risk asset markets,” Koll said in a July 11 research note.
“In my personal view, Japan’s stimulus will be sizable, creative and coordinated – total stimulus of around 2 percent of GDP; the start of ‘Drone Money’ direct cash transfers to targeted groups of households; and de-facto direct funding from the Bank of Japan.”
“The clear mandate given to ‘Abenomics’ in yesterday’s election has raised the stakes for strong economic leadership from Abe – he now has no excuse and has to deliver that ‘feel good factor’ he promised to the people and corporate stake holders. The pressure is on – Abe’s leadership term expires in two years (September 2018),” the Japan economist added.
Assuming a supplementary budget of around 8 to 10 trillion yen, or 1.5 percent to 2 percent of GDP, Koll expects the Bank of Japan to raise its quantitative easing balance sheet growth target from the current 80 trillion yen to 88 to 90 trillion yen.
In its June 2016 Japan review, the IMF said Abenomics had made progress, but sustained higher growth and inflation “remained elusive“ due to structural impediments, a “stop-go” fiscal policy and global weakness.
The IMF said Abenomics needed to be “reloaded” with income policies encouraging wage hikes, labor market reforms that reduced the gap between regular and non-regular workers, and further fiscal and monetary easing, along with structural reforms that boosted the labor supply and increased productivity, such as via the Trans-Pacific Partnership agreement.
“Achieving Abenomics’ ambitious targets will therefore require a more substantial, coordinated policy upgrade. Income policies in combination with reforms to tackle labor market duality should move to the forefront, supported by additional monetary and fiscal stimulus in the near term and more credible policy frameworks,” the Washington-based organization said.
“The fiscal strategy needs to commit to fiscal consolidation over the medium term and replace large discretionary consumption tax increases with a path of smaller, but sustained increases over a prolonged period.”
Donna Weeks, political science professor at Musashino University in Tokyo, told The Diplomat that the election result was relatively unsurprising given the weak state of Japan’s opposition parties.
“The opposition parties remain in a deep funk. They tried different strategies this time including joint tickets in some electorates; they sought to make the argument that this election was about constitutional change, not the economy…and they are all confessing that they failed to fulfil their ambitions,” she said.
“While it wasn’t a complete rout, and they made some small gains here and there, the non-conservative opposition parties have much to reconsider.”
While political attention has now turned to the upcoming Tokyo gubernatorial election, Weeks said the main focus for Abe would be on how he “uses this majority, to what extent constitutional reform will be openly and transparently debated and the plan for a referendum.”
“Abe’s term has been extended until 2018, there is talk he seeks to extend it again to 2020 for the Olympics. It certainly demands a lenient interpretation of the two times two-year term rule…nonetheless, there are rustlings in the leadership group as they look beyond post-Abe. Foreign Minister [Fumio] Kishida’s name appears in dispatches though he is more moderate than Abe’s backers…[but] all eyes will be on how he handles this constitutional mandate.”
For Abe, the election result should prove a reminder that economic issues are the key concern for voters, rather than constitutional reform. As former U.S. President Bill Clinton famously said, “It’s the economy, stupid.”