Abe’s election victory sets up next battle as reform fights loom

Pedestrians walk past an electronic stock quotation board outside a brokerage in Tokyo (file). Japanese Prime Minister Shinzo Abe’s victory in elections to the upper house of parliament yesterday opened a window for him to deliver on promises for structural reforms he says will revive the world’s third-largest economy.

Bloomberg/Tokyo

Japanese Prime Minister Shinzo Abe’s victory in elections to the upper house of parliament yesterday opened a window for him to deliver on promises for structural reforms he says will revive the world’s third-largest economy.

With the avenues now cleared for the government’s bills, the fight for Abe, 58, turns inward — to convince his enlarged party, and a public that turned out in fewer numbers yesterday, that his programme of change is worth enacting. Vested interests are lined up against him on everything from making it easier to fire workers to entering a US-led free-trade zone.

“The important thing for Abe is to quell opposition in his own party — the opposition are no fear for him,” said Shuichi Obata, a senior economist in Tokyo at Nomura Securities Co, a unit of the nation’s largest brokerage. “Speed is extremely important for Abe, so that markets don’t feel he has let them down with the growth strategy. He has to satisfy them within a month,” using time before parliament resumes session to prepare his legislation, Obata said.

The Topix Index of stocks has climbed 59% in the past eight months on optimism that Abe’s three-pronged economic strategy of monetary stimulus, a flexible fiscal stance and business deregulation will end two decades of malaise. The yen has tumbled about 19% against the dollar in that time, offering exporters a more competitive exchange rate.

Abe has already seen how quickly investor sentiment can turn. When he delivered a speech previewing his structural reform agenda that omitted details and showed no legislation would be planned for months, the Topix tumbled 3.2%.

Decisions loom on whether to cut the corporate tax burden; reduce labour regulations dating from the 1960s that offered lifetime employment at larger enterprises; make it easier to consolidate agricultural land; allow greater access to foreign goods and services through the Trans Pacific Partnership trade talks; streamline the approval of medical-industry products; restart nuclear reactors to cut energy costs; and address funding shortfalls in the social-security system.

Abe must also decide whether to proceed with a scheduled increase in sales taxes designed to pare the fiscal deficit in a nation with the world’s largest public debt burden. The prime minister yesterday said that question will be answered around the autumn, with economic data helping determine the call.

Tomoko Kida, a 27-year-old company employee on maternity leave, said her focus in voting for the LDP was on the economy. “Share prices are rising, but no one around me is feeling the benefit. I want him to introduce some policies that raise wages.”

Wages haven’t risen in Japan on a sustained basis since the bursting of the asset bubble in the early 1990s, as companies focused on fixing balance sheets and consumers reined in their spending. Labor cash earnings fell 0.1% in May from a year before.

Angst over incomes may deepen should Abenomics deliver on its promise of inflation, without prompting companies to start increasing compensation.

Among the burdens reducing the incentive for Japanese companies to invest at home is the second-highest level of effective corporate taxes in the Group of Seven nations, executives say. The nation’s 35.6% corporate tax rate compares with 25% in China and 17% in Singapore, according to the Ministry of Finance. Only the US has a higher rate at 39.1%, according to Organization for Economic Cooperation and Development data.

“We want corporate taxes in line with other nations,” Hiroshi Tomono, chairman of the Japan Iron and Steel Federation and president of Nippon Steel & Sumitomo Metal Corp, said at a gathering of industry leaders last week in Karuizawa, northwest of Tokyo.

Abe, who took office as prime minister for the second time in December after leading the LDP to victory in lower house elections, has already overseen a recalibration of the nation’s monetary policy. He installed inflation-target advocate Haruhiko Kuroda in March. Kuroda followed through with an unprecedented plan to double the monetary base over two years.

Consumer prices excluding fresh food are forecast to rise 0.3% in June from a year before, the first increase in 14 months, based on the median estimate of economists surveyed by Bloomberg news before a July 26 report.

Meantime, slowing growth risks stoking dissent among LDP lawmakers just as Abe embarks on his reform legislation. Gross domestic product rose an annualised 2.8% in the three months through June, compared with 4.1% in the first quarter, a survey of 29 economists by Bloomberg indicates.

“Abe has a window of opportunity to undertake real reforms” if he’s willing to use his political capital, said Takuji Okubo, chief economist at Japan Macro Advisors in Tokyo, who formerly worked at Goldman Sachs Group.