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December 8, 2014
Abenomics and the Election
by Tobias Harris
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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. 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. However, 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. 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.

Tobias Harris is the Economy, Trade, and Business Fellow at the Sasakawa Peace Foundation
USA. He is also an analyst of Japanese politics and economics at Teneo Intelligence,
a political risk advisory firm. Mr. Harris has written about Japanese politics for
publications including the Financial Times, Wall Street Journal, and Foreign Affairs
and regularly provides on-air analysis for CNBC, Bloomberg, and other networks.
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Sasakawa Peace Foundation USA
1819 L Street, NW
Suite 300
Washington, DC 20036
202-296-6694
programs[at]spfusa.org
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