Quarterly Investment Strategy
Japan: The longevity issue
However modest some of his achievements may seem, Abe’s political longevity matters for Japan.
Big bang structural reform has not occurred, but granular policy shifts have been gaining traction – continued leadership commitment is necessary for them to become more meaningful.
The Bank of Japan (BoJ) is soon to face important changes at the board level.
How long will Abe stay at Japan’s helm? As of 31 March, with 1,923 days in office, he has already achieved the sixth longest premiership in the country’s history. Following his party’s recent ruling to extend leader term limits, he could in theory remain prime minister though September 2021 – meaning four more years of Abenomics.
Abe’s political longevity will be an important issue for the Japanese economy. At stake is continuity in two areas where he has made genuine progress: structural reforms and monetary policy.
Structural reform measures implemented since 2014 by the Abe cabinet (a cut in the corporate tax rate from near 40% to below 30%, and a consumption tax hike from 5% to 8%) are very similar in nature to what the Trump administration is now considering. The gradual easing of immigration controls contributed to a surprising uptick in the flow of foreign workers and students into Japan last year. And the female labor participation rate has risen amid labour market tightness and “womenomics” campaigns. While not the game changers hoped for by investors in the early days of Abenomics, these are certainly encouraging developments that would get further support from continued political commitment.
In terms of monetary policy, calendar considerations are starker. As in the US, the Japanese government will soon be considering new appointments to the BoJ board. Members Kiuchi and Sato are to be replaced in July, while President Kuroda’s term expires next year. Given widespread public misunderstanding about BoJ policy efficacy, it is important that Kuroda remain in office or that other experts committed to “symmetric” money be appointed – which in turn depends on Abe’s political endurance.
That said, gradual voter fatigue and some internal party fighting (notably around the desire to change Japan’s pacifist constitution) could sap Abe’s popularity and pave the way for a change in leadership. In this regard, the timing of the latest political scandal to hit Abe (a land transaction involving a school operator) is not surprising – albeit of manageable consequences in our view.
Reversion to Japan’s historical pattern of fast-rotating premiership would be lethal to its long-term economic prospects. Such a path would be riddled with ill-conceived public spending measures and a needlessly hawkish central bank. With two or three years probably remaining in Abe’s term, investors should perhaps reflect on that possibility rather than simply focusing on the USD-JPY trade.
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