With his political capital waning, Prime Minister Shinzo Abe looks set to move further toward populist policies to boost support for his leadership and new Cabinet.
With deflation still dragging on the economy and Abe’s ratings plummeting, the prime minister is widely expected to fall back to his rhetoric on Abenomics, a policy mix of radical monetary easing, fiscal spending and vows of structural reforms that a growing number of economists have begun to question.
Abe has also put priority on making preschool and day care services free, despite no clear source of funding, and promoting labor reform in a culture with deeply rooted practices that glorify overwork.
While concerns have been growing about the prospect of looser fiscal policy, a focus on stepping up investment in human-resource development — another of his “priority” areas — is being viewed by some as a way to better cope with a rapidly aging populace.
Economists say Abe’s increasingly perilous position is important because instability hurts efforts to address pressing economic and trade issues.
“With support ratings plunging, we will likely see a shift toward more populist policies to ensure the Abe administration survives,” said Shunsuke Kobayashi, an economist at the Daiwa Institute of Research. “The domestic economy is important, but the prime minister should be someone capable of steering foreign policy toward the United States and China smoothly, advancing economic interests and keeping a grip on currency policy.”
Favoritism allegations concerning approval for a new university veterinary department to land deals for a nationalist school chain have dented voter confidence in the administration. The recent resignation of Tomomi Inada as defense minister over an alleged cover-up only adds to the pain.
The political turbulence comes as the economy, lifted by robust exports to other parts of Asia, is forecast to have grown for a sixth consecutive quarter in the three months to June, with private consumption showing signs of picking up.
With job availability at its highest in over four decades, the nation also faces a severe labor shortage that should lead to higher wages — but could also potentially undermine future growth if it persists.
Skepticism remains over what Abe has described as his goal of achieving a “virtuous cycle” in which strong income growth encourages consumers to increase spending. The Bank of Japan, meanwhile, has pushed back the timing for achieving its 2 percent inflation target for a sixth time.
“Wage growth is far from satisfactory, hopes for monetary policy (benefits) have waned as the BOJ appears to be left with little ammunition, and Japan cannot add fiscal stimulus now. It’s an extremely difficult situation (for Abe),” said Yuichi Kodama, chief economist at Meiji Yasuda Life Insurance Co.
The strength and sustainability of economic growth will come into the spotlight as the government plans to complete the second stage of the doubling of the consumption tax to 10 percent from 8 percent in 2019, and achieve a primary balance surplus by fiscal 2020.
“My impression is that Abe is tilting toward delaying the consumption tax hike again amid his flagging popularity,” Kodama said.
The International Monetary Fund said recently that the sales tax is the preferred option for raising revenue and called for a “gradual and sustained” increase.
In the Cabinet revamp, Abe retained veteran lawmaker Taro Aso as finance minister and deputy prime minister.
Aso, a former prime minister himself, is expected to be tasked with a dual challenge as he compiles the fiscal 2018 budget: Securing funding for the free education plan while weighing the need to fix the country’s tattered finances. He will also represent Japan in new high-level economic talks with the United States.
The government may face a number of challenges in the coming months as U.S. President Donald Trump has taken issue with America’s massive trade deficit with Japan, and is apparently in favor of a bilateral free trade deal in the wake of his decision to withdraw from the Trans-Pacific Partnership.
Japan’s recent decision to increase tariffs on frozen beef from the United States could also prove a contentious topic in the second round of the economic dialogue later this year. Japanese officials say, however, there was “no room for discretion” over the measure taken based on World Trade Organization rules.
Days before the announcement of the new Cabinet lineup, Natsuo Yamaguchi, who heads Komeito, the junior coalition partner to Abe’s Liberal Democratic Party, told Abe he must work to win back public confidence.
Whether Abe can ride out the crisis will ultimately determine his chances of becoming the nation’s longest-serving prime minister. Also at stake is whether Abe and fellow conservatives can achieve their long-standing ambition to rewrite the war-renouncing Constitution, which has overshadowed the economy.
Since returning to power in late 2012, Abe has brashly forged ahead with the often contentious security agenda while soothing the public with assurances that he is putting the economy first.
“Under the current circumstances, I’d expect Abe will bring future-oriented policies to the forefront and free education is one of them,” said Daiwa’s Kobayashi.