Japan PM Abe eyes upper-house election victory to turbo-charge reform agenda

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The ruling party is likely to secure a resounding victory in the parliamentary elections, in part thanks to a lack of viable contenders, analysts say, boosting the Abenomics agenda. Nevertheless, growth-expectations remain mixed.

Optimism over Japanese prime minister Shinzo Abe’s efforts to kick-start the economy and end 15 years of stagnation is split ahead of national elections on Sunday but it is unlikely to derail his chances of leading his Liberal Democratic Party (LDP)-led coalition to a convincing victory.

Overall sentiment remains at relatively high levels, but there appears to be a disconnect between market and business sentiment on the one hand, and public support on the other.

The market has shaken off recent doubts over the rescue plan – dubbed Abenomics – that saw the Nikkei drop 20% in three weeks in May to June, after surging more than 70% since the December elections that swept Abe back into office.

The latest Tankan survey of large manufacturers’ sentiment turned positive in the second quarter for the first time in two years, while private machinery orders – a reliable indicator of business investment – for May came in much stronger than expected.

However, the most recent polling by the Asahi Shimbun newspaper found 44% of those polled did not believe Abenomics would increase wages and employment, against 35% who thought it would.

This was a weekly gain for Abenomics, but still markets expect a softening of public support in the two months after the unveiling of Abe’s economic plan, which strongly linked his policies to wages and employment growth.

The finding is in line with the latest consumer confidence numbers, which show the index fell in June compared with May. Confidence dropped across all four measures – overall livelihood, income growth, willingness to buy durable goods, and employment – with employment showing the biggest fall.

Still, polls ahead of the elections to the upper house of parliament show Abe’s LDP-New Komeito coalition on course for a resounding win, resolving Japan’s "twisted parliament" in which opposition parties controlling the upper chamber are able to block bills.

According to Steven Reed, of Chuo University’s policy studies faculty, this is due more to the lack of a credible alternative than overwhelming support for Abe’s policies.

"Abenomics appears to be working pretty well right now, the economy seems to be turning around, but the polls show very clearly that very few people have felt it themselves," he says.

"It was looking really good until the stock market fluctuated wildly and then people began to think ‘let’s wait and see’. There’s an unease and only in the larger cities is a reasonable percentage of the population saying things are getting better. In rural areas it’s not at all.

"The opposition is divided and there’s really no one place to go if you dislike the LDP. So we’re going to see low turnout in this election because Democratic Party voters will stay home in large numbers and high levels of dissatisfaction among rural voters who comprise the LDP’s key constituency."

He adds: "But even if the LDP loses votes, it will still be the largest party in the single-member districts which are the key swing prefectures, where the seats are really decided and the polls say it will win in all but one.

"So we’ll see a landslide in feet but not necessarily in votes. In December’s general election, the LDP won a major victory with fewer votes than it had in 2009 when it suffered a major defeat."

Voter turnout for the Tokyo assembly elections in June, in which the LDP swept to victory, was the second lowest on record. The contest, seen as a litmus test for the upper house election, proved disastrous for the ruling Democrats and other opposition parties.

Political deadlock has reigned for six years since Abe quit after leading his party to a humiliating defeat in the upper house, resulting in a series of revolving-door leaders.

Winning the House of Councillors could lay the ground for the stability afforded by a long-term, stable government as no further elections are due until 2016. It would hand Abe a popular mandate to push through his three-pronged economic plan of monetary easing, fiscal stimulus and, most importantly, difficult structural reforms needed to revive growth.

There are fears that controlling the lower and upper houses might result in Abe getting side-tracked by the conservative agenda, such as revising the pacifism clause in the constitution. Worse, he might attempt to weaken Article 96, which requires any constitutional amendment be approved by two-thirds of both houses and a majority in a referendum.

On the other hand, a really big win might mean he has his work cut out on his economic policy because it would mean more opposition in parliament to structural reforms, particularly lowering import tariffs on agricultural products and phasing out support for unproductive agriculture.

Other highly controversial reforms include switching subsidies away from protecting jobs in sectors of the economy that are in decline, where people are often under-employed, to helping create jobs in growth sectors.

"There have been some signs in the latest survey data of a little bit of loss of momentum in the economy so there’s a potential concern there about forward-looking indicators," says Julian Jessop, chief global economist at Capital Economics.

"But generally speaking, the recovery is on track and although inflation is still a long way off the 2% target, it is at least heading in the right direction and the markets have recovered from their weakness in May.

"Abenomics is going well but so far they’ve not actually done the hard bits. They haven’t raised the consumption tax, they haven’t tackled any of the difficult, potentially very painful labour market reforms, so it has been the easy bit so far. The hard part still lies ahead."

With the decision on the first consumption tax hike less than three months away, Jessop says once the election is out of the way, he is confident the government will be much more willing to talk about the difficult parts of Abe’s economic plan.

"Abe is clearly quite serious about the reform agenda, so the risk of getting back-tracked into other issues is small," he says. "Everything that they’re focusing on is about moving the economy – and as we know, it’s the economy that wins elections and makes your mark on history."

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