Japan’s Upper House Election: The Fate Of Abenomics At Stake

Japanese voters go to the polls on Sunday, July 21, for the triennial Upper House elections, which will determine the fate of ‘Abenomics’. According to opinion surveys, Prime Minister Shinzo Abe’s Liberal Democratic Party (LDP) and its New Komeito (NK) coalition partner are poised to win a majority in the chamber. This would, ceteris paribus, give Abe a solid mandate to proceed further with his economic agenda.

Abe and the LDP had already won a landslide victory in last December’s general election, which restored the party to power after three years in opposition, but that mainly reflected the unpopularity of the then-ruling Democratic Party of Japan (DPJ). Thereafter, Abe’s popularity surged, peaking at around 79% in March, before slipping to a still respectable 60+%. If Abe gets his majority this weekend, then he would be well-positioned to lead Japan until at least 2016, when the next Upper House election is due in July and the next general election is due by December. A four-year stint in office would be quite an achievement and bring much needed political stability. Most Japanese prime ministers since 2000 have struggled to remain in office for more than a year.

Abe’s Dilemma: Economic Reform Or Constitutional Amendment?

Assuming the LDP-NK coalition gets its Upper House majority, what will Abe do with this? Abe faces a dilemma. For many years, he has favoured revising Japan’s constitution to ease restrictions on the use of Japan’s military, the Self-Defense Forces (SDF). He has also championed patriotic values. In short, he wants to make Japan a great power once again, especially with China on the rise.

However, Abe will also be aware that one of the reasons that his first stint as premier in 2006-2007 came to an abrupt end following the LDP’s severe losses in the 2007 Upper House elections was that he focused too much on boosting national defence and patriotism at a time when voters were more concerned about ‘bread and butter’ issues. Although Japan’s security situation has become more challenging since 2007, due to the re-emergence of the Senkaku/Diaoyu islands territorial dispute with China and North Korea’s increasingly provocative behaviour, voters have tended to be more concerned about economic issues.

Herein lies the risk. If Abe wins a solid mandate in Sunday’s election, then he may well conclude that he has a free hand to focus on constitutional reform. Abe might thus decide to back away from the so-called ‘third arrow’ of Abenomics, namely bold economic reforms to improve Japan’s business environment and make the country more competitive. The first two ‘arrows’, extreme quantitative easing and fiscal stimulus, have provided a much needed boost to the economy, but these are short-term prescriptions. Virtually everyone recognises that the ‘third arrow’ holds the key to a sustained Japanese economic revival. But this is also the most difficult to fire, because it would involve challenging Japan’s vested interest groups and perhaps even transforming Japanese society. For this reason, Abe’s ‘third arrow’ proposals appeared to be somewhat vague, when he tentatively unveiled them in June, and he also indicated that he would not pursue these until the autumn.

From our point of view, it is far from clear that Abe is committed to such reforms, and even if he is, it is unclear whether the public would support neoliberal reforms in practice, even if they support the notion in theory. Japan’s last reformist prime minister, Junichiro Koizumi, swept to power on promises of reform and enjoyed an uncommonly long five and a half years in office (2001-2006), during which Japan emerged from its ‘lost decade’ and enjoyed fairly robust economic growth. However, this was at least in part because the whole world was booming, thereby lifting Japan with it. After Koizumi retired, there was a partial backlash against his reforms, which were blamed for worsening inequalities.

Overall, Abe appears to view Japan’s economic recovery not as an end in itself, but a means to an end, namely making Japan a world power. However, if he fails to revive the economy, then any constitutional revision to empower the SDF would be undermined by Japan’s economic weakness.

Things That Could Derail Abenomics

Apart from the risk that Abe himself could abandon the ‘third arrow’ in favour of defence issues, the following developments could derail Abenomics:

Abe fatigue: Japanese voters are notoriously fickle, and several previous prime ministers have enjoyed high approval ratings, only for these to decline sharply within a year. Japan’s low-tolerance political culture usually compels the prime minister to resign, if their approval rating drops below around 25%.

Opposition from within the LDP or New Komeito: The LDP has traditionally been faction ridden, and internal opposition from within its ranks (or from Komeito) could force Abe to backtrack from structural reforms.

Geopolitical crisis in North East Asia: A military skirmish with China over the Senkaku Islands or a new conflagration in Korea could force a prioritisation of defence issues in the public mind at the expense of structural reforms.

New natural disaster: Japan is very prone to natural disasters, and a new mega-quake could prioritise rescue and reconstruction over economic reform.

New economic crisis: Critics of Abenomics, including BMI, warn that the first two arrows of extreme quantitative easing and fiscal stimulus could accelerate the onset of a debt crisis. If so, Abe could fall from power, and a national unity government would be required, whose priority would not necessarily be structural reform.

Is Abe Japan’s Last Hope?

Abe’s three-arrow strategy is seen by some as Japan’s last hope to revive the economy, before it succumbs to a major financial crisis and becomes permanently sapped by an ageing and shrinking population. Perhaps this is too pessimistic. In Star Wars: The Empire Strikes Back, Obi-Wan Kenobi refers to the hero, Luke Skywalker, as “our last hope”. Yoda, the Jedi master, responds cryptically, “No. There is another”. So shall it be in Japan, if Abe fails. But who is that other?