Abenomics and the Election

Tobias Harris

Publications Abenomics and the Election

Prime Minister Abe Shinzo’s decision to call a snap election may work to his advantage: early polls suggest that his Liberal Democratic Party (LDP) and its coalition partner Komeito will win a landslide victory in the December 14 general election, possibly building on their supermajority. Many observers believe that an election victory will enable Abe to reverse his falling approval ratings and press on with “Abenomics,” his government’s bold set of initiatives to put Japan’s economy on a sustained trajectory of growth. However, it is unclear how returning with a virtually identical majority in the Diet will enable the prime minister to overcome the political obstacles that have thus far prevented him from making substantial progress in realizing a virtuous cycle of rising investment, wages and consumer demand or implementing growth-enhancing structural reforms.

At its heart, Abenomics is a political program. It is not just about changing monetary policy or agricultural policy or trade policy. It is about who makes policy and on whose behalf policy is made. To succeed, Abe must continue to overcome traditionally dominant actors in every area of economic policymaking.

  • In monetary policy, the prime minister has had to overcome traditionalists at the Bank of Japan skeptical of the BOJ’s ability to use unconventional tools to overcome deflation. In this area, Abe succeeded in part by threatening to curtail the BOJ’s statutory independence. To the extent that rebalancing the portfolios and reforming the governance of Japan’s public pension funds supplements the BOJ’s quantitative and qualitative easing (QQE), the prime minister has also had to address opposition among the bureaucrats of the Ministry of Health, Labor and Welfare (MHLW), who oversee the pension funds.
  • The challenge in fiscal policy was gaining control of the content and timing of fiscal consolidation from the finance ministry and the LDP’s fiscal hawks and enabling the prime minister’s office to make deficit reduction conditional on the health of the economy. The fiscal hawks succeeded in raising the consumption tax 3% in April 2014, and the result was a recession (or near-recession). While Abe has delayed the second planned consumption tax hike, the hawks are focused on a new fiscal consolidation plan, and as Moody’s (largely symbolic) downgrade of Japanese government debt suggests, they will have help from abroad in pressuring Abe to prioritize deficit reduction sooner rather than later.
  • The “third arrow” – a mix of structural reform and industrial policy – is aimed at vested interests in sectors across the Japanese economy, whether the Central Union of Agricultural Cooperatives (JA-Zenchu), which dominates agriculture production and policymaking, or Keidanren and the corporate sector, which have resisted the Abe government’s calls for corporate governance reform. In other areas, including immigration and labor-market reform, the Abe government has softened its position after meeting resistance, often from within the LDP.

In short, for Abenomics to succeed Abe has to challenge powerful bureaucrats, businesses, farmers, lobbyists, and members of his own party. The problem is that there are few signs that winning a general election will help Abe implement his preferred economic policies.

Partly that results from Abe not establishing clear priorities regarding which reforms are most important and urgent. By trying to do everything at once, the Abe government has invited entrenched interests to dig in their heels, prolong the reform process, and hope that the government’s attention shifts elsewhere.

Meanwhile, opponents of Abenomics have a number of tools at their disposal to stall or block change. In fiscal policy, the finance ministry and the LDP’s tax commission have supported each other; they also have the backing of the business establishment and international financial institutions in making their case for fiscal consolidation. Meanwhile, JA-Zenchu has been able to mobilize its allies in the LDP to water down government proposals that would reduce the federation’s powers over Japanese farmers – and has used the general election to force friendly LDP members to commit to defending it from the Abe government’s reform plans.

Abe has also chosen a different route from that of former Prime Minister Koizumi Junichiro who used elections to push reforms opposed by entrenched interests, directly confronting those within the ruling coalition representing those interests and appealing to the public to support him in his efforts. Instead, Abe has used the snap election mainly to criticize the opposition parties for failing to offer economic plans of their own rather than laying the groundwork for a robust post-election push to overcome opposition from his own and other parties and implement his preferred policies. Further, by calling an election now, Abe has used a potent tool for keeping backbenchers in line, one he cannot employ again as the policy debates and decisions take place in coming months

That said, the prime minister’s office has succeeded in centralizing power, and Abe may emerge from the election with a bump in his approval ratings. But a prime minister’s approval ratings are fragile, and Abe’s will be closely tied to the outcome of the economic policies to which his name has been attached. Incomes have not kept pace with rising prices and the dramatic drop in the yen/dollar exchange rate is further reducing household buying power even as controversial issues on the government’s agenda in 2015, including restarting nuclear reactors and passing national security legislation, will require the prime minister to expend significant amounts of political capital. Unless Abe is able to gain and leverage a new parliamentary mandate and an increase in public approval, opponents will enjoy a better chance of resisting the difficult policy changes critical to Abenomics success in fostering Japan’s sustained economic growth.

2024 Sasakawa USA | Privacy Policy | Sitemap

Custom WordPress Design, Development & Digital Marketing by time4design