With official campaigning for the 48th Japanese general election on 22 October underway, Prime Minister Shinzo Abe looks increasingly likely to fend off the challenge of the Party of Hope formed by Tokyo Governor Yuriko Koike.
Abe, post-war Japan’s third longest-serving prime minister, called the snap election to strengthen his mandate. The opposition is in disarray and lacks a credible leadership candidate; although she remains party leader, Koike will not stand in the election. Investors are maintaining their hedge against upheaval, but it is the performance of Abe’s Liberal Democratic Party, rather than the strength of the opposition, which will determine if he maintains his political dominance and improves upon his super-majority.
The Party of Hope – formed only hours before Abe called the election – disputes Japan’s reliance on fiscal and monetary policy to bolster the economy. But by first forming a new party just before the election and then choosing not to stand in the poll, Koike has undermined the strength of the overall opposition in Japan.
The party released a manifesto appealing for change to Japanese central bank policy. Some had hoped that a lively debate with the Party of Hope and other opposition groups would compel the ruling bloc – comprising Abe’s LDP and the smaller Komeito party – to release an updated timeline for Abenomics. However, the rapid decline in support for the Party of Hope makes this improbable. The expected reappointment of Haruhiko Kuroda as governor of the Bank of Japan likewise increases the likelihood of the country’s loose monetary policy continuing in the near term.
If Abe secures a stronger majority, a further four years of economic stimulus should bring Japan’s latest recovery to fruition. The economy is enjoying its longest sustained period of growth since the mid-2000s. The BoJ’s quarterly Tankan survey, which samples more than 10,000 companies, shows that confidence among large manufacturers rose to its highest in a decade, as a weak yen and robust global demand add momentum to the recovery.
Corporate profits are rising faster than GDP, emboldening capital-rich Japanese companies to increase investment. Employers are looking to hire more as well. The ratio of job vacancies to applicants is at its highest since 1974, adding to pressures for further visa policy reform for international workers. With the labour market so tight and companies flush with money, wages will soon begin to rise. This will provide a boost to consumer confidence and demand.
However, with inflation far below the 2% target, the BoJ still faces a dilemma. The central bank’s massive purchases of Japanese government bonds has pushed up their prices, keeping yields low. Market watchers have pressed Governor Kuroda to discuss how he plans to unwind the easing measures. The consensus remains that the BoJ will keep interest rates negative and anchor 10-year bond yields around zero at a time when other major central banks are looking to slowly tighten policy.
Regional concerns extending beyond the impact of loose monetary policy loom large. Findings from the Pew Research Center about North Korea show that Japan is more concerned than even South Korea about the Pyongyang nuclear threat. The unpredictability of US President Donald Trump raises persistent risks of disruption in the Pacific. Such troubles have led many in Japan to conclude that maintaining its domestic political status quo is best for its foreign relationships.
Markets have proved sanguine in the face of domestic and geopolitical squalls. But if Abe fails to secure a stronger majority on 22 October, a significant correction cannot be ruled out.
Adam Cotter is Head of Asia and Chief Representative Singapore at OMFIF.