Japan: Driven by politics - ING

There are two main themes to the Japan right now:  1) The slow burning but nonetheless perceptible pick-up in the macroeconomy, and stabilisation of the price level (though still way off improbable 2% inflation targets) and 2) The political problems of PM Shinzo Abe and his deeply unpopular cabinet that could undermine his hold on Japan’s top job, according to Rob Carnell, Research Analyst at ING.

Key Quotes

“The background economic improvements have been in place for a while now, and there are few important deviations from that trend, or indeed any notable changes to our macro-forecasts this month. So our main focus will be on point 2) and what this might mean for economic policy in the months and years to come.”

“Abe technically does not have to go to the polls until September 2018, but potential cracks with his coalition partners, Komeito, mean that he may not be able to hang on to power that long. If so, what is the future for Abenomics? The quick answer to this is, probably not much, but there are nuances depending on who would succeed Abe as PM.”

“Even without Abe at the helm, the future for economic reforms looks pretty dim. Donald Trump’s pulling out of the Trans Pacific Partnership (TPP) has left that free-trade deal in limbo, and this would have been one of Abe’s main channels for economic reforms. The TPP looks challenged with Abe as PM or indeed anyone else. Likely LDP successors to Abe include Foreign Minster Fumio Kishida. Abenomics-Lite seems a likely outcome under a Kishida government.”

“But there is a more radical alternative suggested by the recent drubbing of the LDP in the Tokyo Metropolitan elections last month. These saw the LDP kicked out of power and overturned by the Tomin First Party led by former LDP Defence Minister, Yuriko Koike.”

“Although the challenges for Koike are considerable, not least, rolling out her Tokyofocused party across the country, many are already considering her as a possible next PM, and Japan’s first female Prime Minister.”

“In terms of policy stances, and given her political background, Koikenomics may not differ on paper very much from Abenomics, but perhaps with a greater focus on labour market reform and female labour market participation. What would really distinguish her from Abe, and mark a clear difference from Donald Trump, would be if she actually managed to implement her reforms. For that, she will need not just to become PM, but to take control of Japan’s Upper House too. And elections here are not due until 2019, shortly before the Tokyo Olympics. Depending on how these go, how big the almost inevitable overspend, and any allegations of corruption associated with the granting of construction contracts, this could either be an opportunity for Koike, or an impediment. In other words, political change may be coming to Japan, but don’t hold your breath.”