For Abe, It's Time to Deliver
Comment of the Day

July 16 2013

Commentary by David Fuller

For Abe, It's Time to Deliver

Here is the concluding section for this interesting summary from the NYT and IHT, of what is at stake in Japan's Upper House election this Sunday (subscription may be required to read the full article, a PDF is also provided)
A split among Mr. Abe's growth strategists between those who see a big role for government in picking and backing new growth sectors, and those who want government to get out of the way to allow innovation, also clouds the outlook for overhauls.

Too decisive a victory on Sunday could make it harder for Mr. Abe to push through the sort of changes that would harm traditional Liberal Democratic supporters.

Such a win would raise the number of members of Parliament with ties to vested interests and increase complacency in the party.

Some media forecasts give Mr. Abe's party a shot at winning an upper house majority on its own for the first time since 1989. With no national election required again until 2016, members keeping quiet now are likely to become more vocal after Sunday.

"Are we dealing with Japanese politics?" said Mr. Koll of J.P. Morgan. "The answer is yes. Will there be compromise? You bet. The risk of compromise moving to the forefront gets bigger the bigger they win."

Mr. Abe will also face a tough decision in the autumn on whether to give the go-ahead for a plan to raise the sales tax to 8 percent from 5 percent next year, the first stage in a scheduled doubling by October 2015 to help limit the huge public debt.

Some party members fear the tax increase would derail a recovery, but postponing it could cause havoc in financial markets, where the delay would be taken as a signal of reneging on fiscal overhaul.

The International Monetary Fund, while giving a cautious approval to Abenomics, has warned of risks if Japan does not both cut its debt - already twice the size of its $5 trillion economy - and enact structural overhauls.

David Fuller's view Inevitably, there are plenty of negotiations in any genuine democracy, including Japan's. After nearly 20 years of deflation, presided over by numerous different political leaders, Japan's electorate will understandably remain cautious. Moreover, an economy previously in a long, slow decline will have some entrenched positions, including some influential members of Mr Abe's Liberal Democratic Party, such as the farmers.

As a Prime Minister with a significant majority in both houses following Sunday's Election, Mr Abe's challenge will be to steer the economy in directions that benefit Japan, rather than factions within his Party, if these interests are not compatible.

None of us know how Abenomics will play out over the medium to longer term. Nevertheless, it has certainly excited Japan's electorate, and more recently, what is now a majority of the country's corporate leaders.

Japan has been a leading performer among developed country stock markets since Mr Abe's policies were recognised in mid-November 2012, just before his election victory in December. With good reason, I believe, because this remains the most pro-stimulus and pro-stock market government currently in power.

It pays to back such policies, at least while they remain popular and the stock market continues to perform. Consequently, I would continue to give Japan's stock market recovery the benefit of the doubt, at least until we see evidence that it is waning. In this environment, it usually pays to buy following reactions within the overall upward trend.

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