With Shinzo Abe stepping down, whoever succeeds Japan’s longest-serving prime minister will be sure to face daunting economic challenges.
Markets will be keen to see if the next administration will stick to Abenomics, his namesake economic program consisting of aggressive monetary easing, flexible fiscal spending and structural reform.
While the names of potential candidates have been floated, economists say Japan’s next leader will likely maintain the basic Abenomics framework. Since Abe’s program was sustained by nearly eight years of political stability, it will be crucial for the next prime minister to send clear messages of continuity to avoid surprising financial markets, which are sensitive to uncertainty.
But when it comes to revving up the economy, his successor’s hands will be tied as the fallout from the COVID-19 pandemic continues to inflict damage, putting the government in a completely defensive position.
“For sure, markets will be watching the continuity. I think many are assuming that things won’t change a lot, but the new prime minister will need to clearly explain that,” said Daiju Aoki, chief investment officer at UBS Wealth Management Japan.
They will especially be watching whether there will be changes in monetary policy. One of the pillars behind Abenomics has been aggressive monetary easing by the Bank of Japan led by Haruhiko Kuroda.
BOJ’s massive purchases of long-term Japanese government bonds and exchange-traded funds is widely believed to have helped lower the yen’s value, which has supported export-driven companies and boosted stock prices for roughly eight years.
Since Kuroda’s term lasts until April 2023, major changes are unlikely to occur with monetary policy in the short term, Aoki said, adding it also doesn’t seem reasonable to push for changes during a public health crisis.
After Abe announced his plan Friday to resign due to chronic ulcerative colitis, a bowel disease, several members of his ruling Liberal Democratic Party expressed their intention to run for the party’s presidential election, which effectively decides the next prime minister.
They include former Foreign Minister Fumio Kishida, former Defense Minister Shigeru Ishiba and former Internal Affairs and Communications Minister Seiko Noda. Chief Cabinet Secretary Yoshihide Suga is also seen as a main candidate.
Abe, who doubles as LDP president, said he will remain in office until his successor is picked, which will reportedly take place on or around Sept. 15.
Aoki said whoever succeeds Abe is expected to keep the Abenomics framework in place, though some details may vary.
Whether the new administration can maintain political stability will play a large role as the world’s third-biggest economy has seen a moderate recovery during Abe’s nearly eight years in office.
Before Abe’s second stint as prime minister began in 2012, “Japan had seen six prime ministers in six years… if Mr. Abe’s successor cannot gain people’s support, the political situation may go back to before Abenomics,” which will be a risk for the economy, said Aoki.
In addition, economists point out that political stability under the Abe administration has strengthened Japan’s diplomacy to benefit its economy by laying groundwork for trade deals and foreign-exchange policy. In terms of diplomacy, however, Abe’s successor may have a tough time living up to expectations.
On top of political and policy continuity, the next leader will have to protect the economy from the COVID-19 pandemic.
“Whether Mr. Abe steps down or not, it is quite difficult to reconstruct the economy because measures to stimulate (demand) don’t really work in this situation,” said Shunsuke Kobayashi, chief economist at Mizuho Securities.
The pandemic will make it extremely tough for the next prime minister to draft policies that reflect a personal touch as Abe did with Abenomics during his economic campaigns.
Since the coronavirus has significantly curtailed public mobility, policies to stimulate demand aren’t really viable. Also, such stimulus measures usually come with a risk of escalating infections.
The government rolled out the Go To Travel subsidy program in July with a massive ¥1.35 trillion budget to support the battered tourism industry, but the campaign has been heavily criticized for spreading the deadly virus further.
Rather than galvanizing economic activity, the government has had to focus on defensive moves to limit the damage from the pandemic by shoring up its safety net to shield jobs and prop up companies severely damaged by the virus.
Also, because the government has already deployed two record stimulus packages worth about ¥117 trillion, the incoming prime minister’s fiscal options will be limited.
“The government will need to continue to deal with the pandemic and do what’s necessary to contain it while limiting the economic damage … whoever becomes the prime minister, he or she will have to face the same issue and take the same necessary steps,” Kobayashi said.
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