Election victory will give Abenomics a needed boost
Nicholas Spiro says success, however, will hinge on crucial reforms
Japanese Prime Minister Shinzo Abe has a spring in his step. His Liberal Democratic Party's decisive victory in Sunday's election gives his government a solid majority in both houses of parliament and three election-free years to implement its radical policies aimed at reflating Japan's economy.
Abe is now Japan's strongest and most popular leader since Junichiro Koizumi. Politically speaking, this bodes well for Abenomics, the far-reaching economic reform agenda that has captivated financial markets since the LDP came to power in December.
The stage is set for the most important phase of Abenomics, and the one investors have been waiting for: the "third arrow" of structural reforms that are crucial to maintaining confidence in what is, for now, a huge stimulus programme.
The stakes are high for both Japan and the global economy, particularly at a time when the US Federal Reserve is about to scale back its asset purchases and there are concerns about China's economy.
Three big questions surround Abenomics. The first concerns Abe himself: is he a committed economic reformer or is his programme part of a nationalist political agenda aimed at restoring "greatness" to Japan? Abe is, after all, a cultural conservative. Having tightened his grip on parliament, the risk is that his right-wing instincts may become more pronounced, allowing politics to supplant economics.
This is unlikely, given that a strong economy is central to Abe's political objectives. The bigger concern is whether he is ready to take the tough decisions to maintain credibility in his bold economic project. A first big test is the long-awaited announcement on whether to approve a 3-percentage-point rise in Japan's sales tax next April, to 8 per cent. A decision must be made by October.
For a government seeking to aggressively stimulate growth, a consumption tax hike seems like a foolish policy. The last sales tax increase in Japan, in 1997, ended in disaster, contributing to a recession and forcing the prime minister who approved it to resign. Yet if Abe postpones the tax hike, doubts about Japan's fiscal credibility - long a concern given the country's staggering public debt burden that is approaching 240 per cent of gross domestic product - could undermine confidence in Abenomics.
The most important question, however, concerns the crucial supply-side measures aimed at boosting Japan's deplorable long-term growth rate. These include much-needed labour market reforms, aggressive deregulation of product markets as well as a host of other initiatives to promote trade and investment.
In order for the reforms to succeed, Abe has to face down the powerful interest groups within his own party that have long stymied structural change in Japan.
The challenges facing Japan's premier are enormous. Yet if the popular Abe can't grasp the nettle of reform, it's unlikely that anyone else in Japan can.
Nicholas Spiro is managing director of London-based Spiro Sovereign Strategy