Pacific Money

A Vote for Abenomics

After his Upper House election victory, Japan’s PM gets ready to tackle long-awaited reforms.

Japanese Prime Minister Shinzo Abe has put the world’s third-biggest economy back on investors’ radars with his potent blend of economic policies, popularly known as Abenomics. But after winning support from voters in Upper House elections for his “historic project” to defeat deflation, the second-time leader faces his biggest challenge yet: delivering on structural reform.

"We've argued that our economic policies aren't mistaken, and the public gave us their support. People now want to feel the benefits,” Abe said on July 21, after his conservative coalition regained control over the upper house for the first time since 2007.

"We'd like to do our best to generate a positive cycle in which job conditions improve and wages rise, boosting personal consumption and prompting companies to invest more, as soon as possible," he added.

The poll saw the lowest turnout since 1995, of just 51 percent, but it was widely seen as a mandate for Abenomics’ three arrows of monetary and fiscal expansion along with pro-growth reforms. Although Abe’s Liberal Democratic Party (LDP) fell short of gaining a majority in its own right, the victory by the LDP and its coalition partner New Komeito has improved the likelihood of an extended stay in office.

The positive results of Abenomics have been seen in a surge in Tokyo stocks, with the benchmark Nikkei Stock Average up more than 60 percent in the year to July 30, along with a rapid 4.1 percent annualized expansion in GDP for the first quarter. Early signs of an end to deflation have been seen with consumer prices posting their biggest increase since 2008 in June, up 0.4 percent and ahead of economists’ forecasts.

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Reform grab bag

Having launched record monetary stimulus and around $100 billion worth of extra spending, Abe faces a far harder task of delivering on a grab bag of structural reforms. Markets were far from excited by the initial announcement on June 5, with the Nikkei index dropping 3.8 percent on the news.

With measures ranging from more child-care centers to promoting corporate consolidation, agriculture and health reforms and greater foreign investment, there was something for everyone in the plan.

However, perhaps the most contentious among them was his push for Japan to join the Trans-Pacific Partnership (TPP) regional free trade grouping. Ironically, some of the winners of the Upper House poll included anti-reformist members of the ruling coalition, including the vice chairman of the national medical association.

Japan’s debut at last week’s TPP negotiations in Malaysia was reportedly welcomed by other participants in the 12-nation talks, which could create a free trade zone covering some 40 percent of global gross domestic product and a third of world trade.

Yet while Abe has pledged to “protect what should be protected and attack what should be attacked,” even the pro-business Nikkei has questioned whether the LDP is capable of abandoning traditional tariff protections.

“The time will eventually come when Japan can no longer rely on tariffs. To prepare, it must draw up reform measures quickly…This can be done only through strong political leadership,” the economic daily’s Yasuhiko Ota warned.

Tax challenge

But if challenging sacred cows is not enough, Abe has inherited a fiscal reform from his predecessors that could cause a serious headache. In April 2014, the government is scheduled to hike the consumption tax rate from 5 percent to 8 percent, and then to 10 percent in October 2015 – akin to braking while attempting to drive the economy at full speed.

Abe is expected to make a final decision on the tax rise by October, with his economy minister Akira Amari telling reporters Tuesday that only an extraordinary event like another Lehman shock would prevent the increase.

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However, Japan analyst Donna Weeks of the University of the Sunshine Coast told The Diplomat that the prime minister had the stomach for the battle.

“I think he’ll force through the consumption tax hike; he sees that this is where he has a mandate. He is pressing ahead with the TPP, notwithstanding the strong positions the [Japanese Communist Party] and [activist Taro] Yamamoto took against pursuing a completely open free trade approach,” Weeks said.

Could Abe outlast his opponents, challenging the LDP’s previous reformist leader Junichiro Koizumi for longevity?

“Abe keeps reiterating that he is stronger than last time and that ‘illness’ will not force his hand…There are no further national elections required now for about three years, so if everything works in his favour, he might manage the three years,” Weeks said.