Abe’s success with BOJ picks likely to boost LDP prospects for July poll

by Isabel Reynolds

Bloomberg

Prime Minister Shinzo Abe is riding a popularity wave unseen by six immediate predecessors, including himself in his first short-lived stint, as he pushes his Bank of Japan nominees through a divided Diet, raising the odds of the ruling party winning a July election.

Buoyed by a surge in the benchmark stock index to a 4½-year high — spurred by his antideflation policy — Abe has the highest approval ratings since the popular Junichiro Koizumi stepped down in 2006 and he was installed without a general election. This week he may secure his biggest achievement since he took the helm in December, with the Democratic Party of Japan, now the largest opposition force, signaling it will back Haruhiko Kuroda for BOJ chief.

With analysts from Citigroup Inc. to Barclays PLC raising growth forecasts, an improving economic outlook gives the ruling Liberal Democratic Party a tailwind heading into the July election for the Upper House, which it doesn’t control. A win may bring an end to an annual revolving-door of leaders, and give Abe a mandate to pursue free-trade talks opposed by farmers.

“This will be seen as a significant victory for his inflation-targeting policies and for his political skill,” said Gerald Curtis, a professor of Japanese politics at Columbia University in New York, referring to approval of the BOJ picks. “It’s probably enough for him to win convincingly in the Upper House election. Now the question is what he will do when he gets to the really hard issues, like structural reform.”

The last time the LDP held a majority in both chambers of the Diet was during the 58-year-old Abe’s first term as prime minister, in 2006 to 2007. In December, he led the party to victory in the Lower House pledging to fire “three arrows” into the economy to end two decades of stagnation.

His first shot is poised to hit home, with Kuroda, who has backed greater monetary stimulus, Monday completing confirmation hearings. Lawmakers in the DPJ, which makes up the largest party in the Upper House, last month indicated they will vote for Kuroda. The Diet also must vote on academic Kikuo Iwata and BOJ staffer Hiroshi Nakaso as deputy chiefs.

Abe has also introduced a ¥10.3 trillion fiscal stimulus package as the second point of his three-part plan. The third step is to cut regulations to give businesses greater incentives to invest and hire. His political skills will be tested as he seeks to implement plans outlined in a Feb. 28 speech to reduce record debt, give more autonomy to regions and restructure the bureaucracy.

Among the most contentious initiatives would be joining negotiations for a U.S.-led regional trade agreement, a step members of his own party, including former defense chief Gen Nakatani, oppose. Nakatani said on his website last month it would have “immeasurable effects on agriculture.”

The Trans-Pacific Partnership talks now involve 11 nations. Japan’s participation in such a pact would boost gross domestic product by as must as ¥3.2 trillion, according to a 2010 government study.

Abe, who discussed the talks with U.S. President Barack Obama last month, said last week that “it’s in Japan’s interest to pursue free trade” and that he won’t take too much time before making a decision on the TPP. The ruling party holds its annual convention at the end of this week.

American automakers oppose Japan’s participation unless it eases barriers, and Japanese farmers argue the deal would mean the collapse of their industry should a 778 percent rice tariff be scrapped.

“Abe’s policies seem to be appealing to urban businessmen,” said Aiji Tanaka, a political science professor in Tokyo at Waseda University. “If he pushes through the TPP, he will start losing traditional LDP support,” he said, referring to the rural districts that underpinned the party’s half-century domination of politics before it was upended by the DPJ in 2009.

For now, the prime minister enjoys broad support, with his approval rating reaching 70 percent, according to a Feb. 25 Nikkei newspaper poll. He is the first leader to see his popularity increase in his first month since Koizumi in 2002.

Investors also have applauded. The Nikkei 225 stock average has risen 27 percent and the yen is down 13 percent since the LDP landslide in December. Adding cheer is a turnaround in the economy — fourth-quarter GDP rose an annualized 0.2 percent, and will increase 2 percent this quarter, a Bloomberg News survey of economists indicates.

Meantime, the DPJ’s poll trouncing has left it reluctant to confront Abe. The party ousted the LDP in 2009 only to see initial public inspiration evaporate as it repeated the former ruling party’s record of revolving-door leaders, Cabinet reshuffles, gaffe-driven ministerial resignations and campaign-finance scandal.

“The DPJ has in effect collapsed, they can’t be unreasonable anymore,” said Minoru Morita, an independent political analyst in Tokyo. “They were severely criticized by the public in the election and they’ve decided not to oppose appointments in most cases.”

An Upper House victory would give Abe more than three years before facing the electorate again, potentially making him the longest-serving prime minister since Koizumi. A poll published by Kyodo News on Feb. 25 found that 41.7 percent of respondents planned to vote for the LDP in July’s vote.

Abe quit after a year his first time as prime minister, plagued by party scandals and pleading ill health. While an election victory will mark another point of redemption, he must grapple with Japan’s record debt and the impact of a planned increase in the 5 percent sales tax starting next year.

“I think the real battle comes after the election,” said LDP lawmaker Masahiko Shibayama. “What will he do about spending cuts and the pain that will come from easing regulations? He has strong support, but trust could disappear rapidly if he gets this wrong.”