A Rising Political Crisis Could Derail The World’s Third-Largest Economy

Questions over the future of the leader of the world’s third largest economy and his namesake economic program loom large as the economy battles an acute crisis of confidence.

Support for the 62 year-old has been pushed to under 20 percent — his lowest level ever, due to public backlash over suspected cronyism on the part of Japanese Prime Minister Shinzo Abe.

Approval for a veterinary school, belonging to Kake Gakuen, an educational institution headed by a longtime friend of Abe’s, in a special economic zone, was helped to be obtained by the Liberal Democratic Party head is the allegation that is doing the rounds since May. The ruling LDP, suffered a historic defeat in July’s Tokyo assembly election eve though the PM has denied granting any favors but the affair — his second school scandal this year.

Issues at the defense ministry and general disillusionment with his leadership have also weighed down Abe’s popularity. Due to concerns that she helped conceal records that exposed the dangers faced by Japanese peacekeepers in South Sudan, former Defense Minister Tomoni Inada resigned last week.

While it’s not yet clear whether he can remain in office until the LDP presidential election in September 2018, in a bid to strengthen ratings, the PM is now due to reshuffle his cabinet.

“There is now a real chance that Mr. Abe will be out of office before the next legislative elections,” Capital Economics said in a recent note. “Should he leave office, one of the most important questions for investors is whether his plan to revitalize Japan’s economy, commonly known as Abenomics, will go down with him.”

The three pillars that make up of Abenomics are fiscal policy, monetary easing and structural reforms. While the latter remains in progress, Tokyo has delivered on the first two. But reforms are now expected to take a backseat as the embattled leader concentrates on restoring his reputation as Abe’s political clout weakens.

“The scandal is a serious threat to Abenomics because the approval rate fell even before important reforms were implemented,” said Kohei Iwahara, economist at Natixis Japan Securities. “The government needs a high approval rate from the citizens to implement the necessary reforms, which could inflict pains to its citizens through job losses.”

Tobias Harris, Japan vice president at Teneo Intelligence explained that Abe now has less ability to move controversial structural reforms — known as the Third Arrow — through the political process.

“Strong public support gave Abe political capital with which to pursue controversial reforms, but it also made him reluctant to use his political capital lest he risk his public support. Now, with his support falling, it’s that much harder for Abe to take risky policy decisions.”

Social security incentives to boost female participation in the work force and changes in the labor market to increase wages are among the key reforms still pending.

As of late, “the Third Arrow has run out of steam with no major reforms on the agenda,” Capital Economics said. “As such, while we don’t have high hopes for structural reform if Mr. Abe stays in office, nor do we if he were to leave.”

(Adapted from CNBC)

Categories: Economy & Finance, Geopolitics, Strategy, Sustainability, Uncategorized

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