The very idea of big-spender Shinzo Abe’s reappointment as prime minister was enough to send the yen falling against the dollar and spurred the Nikkei above the 10,000 mark for the first time in months.
Now that Abe’s reascension is official, market players are eager to see if his actions will live up to his words.
“Abe’s moves have stimulated the market, especially the strategies he has put forward that signal more economic growth,” Takuya Takahashi, a senior strategist at Daiwa Securities, said in a lecture delivered earlier this month. “Overseas investors have high hopes for Abe as well,” he added.
The prime minister’s economic policies, dubbed “Abenomics” by economists and market players, include spending ¥200 trillion over the next 10 years on public works to improve disaster preparedness.
Though frowned upon by some, the Liberal Democratic Party’s pump-priming strategy is likely to be implemented quickly.
Installing Taro Aso as finance minister is a sign that Abe is going all in. During his own stint as prime minister, Aso favored spending to stimulate the economy.
LDP executives are scrapping the spending cap on the annual budget that was put in place by the previous Democratic Party of Japan administration to curb the nation’s runaway debt.
For austerity-minded lawmakers, the new administration’s policies amount to a nightmare after Christmas.
University of Tokyo professor Takatoshi Ito argues the nation would be better served if the Abe administration balanced spending with higher taxes.
Lavish spending will inevitably worsen Japan’s fiscal balance, the expert said during a news conference at the Foreign Correspondents’ Club of Japan earlier this month, and called on Abe to introduce higher consumption tax rates as planned.
What’s more, Ito said the new prime minister must outline a solid growth strategy by at least February, including launching an economic strategy council.
So far, the LDP has succeeded in pressuring the Bank of Japan to ease its monetary grip and set an inflation target of 2 percent. Last week, the central bank added ¥10 trillion to it asset purchase program, and is expected to double its inflation target next month to match Abe’s 2 percent goal.
However, many economists regard this target as beyond reach, especially if the government fails to provide its own growth strategies and relies on the BOJ alone to tackle the issue.
A weaker yen should help major exporters, but Daiwa Securities’ Takahashi believes repairing ties with Beijing is imperative for Abe and the economy. Trade with China has slumped since a territorial dispute over the Senkaku Islands broke out in earnest this year.
Abe appears up to the task, even if it means toning down his foreign policy. The hawkish prime minister has already decided not to visit the contentious war-related Yasukuni Shrine nor make further moves on the Senkakus, including allowing permanent residents, to avoid worsening strains with China.
Experts, meanwhile, say the transfer of power from the DPJ to the LDP should bring changes to financial policy management.
Daiwa’s Takahashi said the DPJ showed “signs of inexperience” and at times “couldn’t make a political decision since it seemed difficult for the party members to agree on an issue.”
However, there is concern the new LDP-led administration could feel too comfortable again back in the driver’s seat, a position it enjoyed for decades until 2009.
The resurgence of the LDP’s tax commission earlier this month raised eyebrows. Many view the closed group as having too much power and too little transparency when it comes to making decisions on the government’s tax policies.
Experts fear the LDP could revert to old habits, such as huddling with industry leaders behind the scenes.
Last week, LDP tax commission chief Takeshi Noda said his panel exists to reject tax-related requests that can’t be handled by the Finance Ministry or the prime minister, but effectively acknowledged that his team will have unparalleled power to do so.
Above all, Abe’s administration must solve the problems hampering the economy if it hopes to win over voters in July’s Upper House election.
Abe must also work quickly to form the next fiscal year budget, a task usually finished by the end of December. Solid economic growth must be achieved by the latter half of 2013, ahead of the planned consumption tax hike in 2014.
The LDP seems aware of the urgency. It is already in talks with coalition partner New Komeito on a proposed ¥10 trillion supplementary budget, to be used on public works projects.
So far at least the market has responded positively to the new leadership. When word of a snap election broke last month, paving the way for Abe’s return as prime minister, the yen dropped and stocks rose — a sign, Keio University professor Masaya Sakuragawa told The Japan Times, that “there is a good wind blowing in favor of the economy.”
The economics expert recalled the favorable reaction that greeted former Prime Minister Junichiro Koizumi’s administration when Japan marked an extended period of economic growth in the early 2000s.
“It was difficult to point out what exactly made the economy grow back then, but let us hope that this time around the same wind will lift the country again,” Sakuragawa said.