FACTBOX-Key political risks to watch in Japan
TOKYO, Feb 24 (Reuters) - Japanese Prime Minister Shinzo Abe, who took over in December for a rare second stint in power, is concentrating squarely on the economy.
Support rates of over 60 percent and rising Tokyo share prices suggest voters and investors are willing at least for the moment to back "Abenomics" - a mix of big spending and hyper-easy monetary policies with a promise of reforms to come.
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Below are some of the key political risks to watch.
Abe led his party back to power saying both the government and the central bank would take decisive steps to lift an economy out of the deflation that has smothered it for years.
His push for looser monetary policy prompted the Bank of Japan to double its inflation target to 2 percent, a distinctly bold move from the conservative central bank, and agree to an "open ended" asset buying programme from 2014.
The yen's value versus the dollar has fallen sharply in the past few months, making Japanese-made goods more competitive overseas and boosting profits at some exporters, but some policymakers and officials worry that radical measures could unsettle financial markets and add to Japan's debt burden, already the highest among industrialised countries.
Key to the success or failure of Abe's administration will be the central bank's behaviour, which in turn depends on the identity of its governor.
Abe wants a radical policymaker to take over when Masaaki Shirakawa steps down in March, and pitch straight into aggressive asset-buying to pump money into the economy, but the need to secure approval by both houses of parliament means he may have to settle for someone who is not his first choice. Abe's ruling bloc does not have a majority in the upper house, and as a result the government will consult opposition parties before naming its choices.
What to watch:
- Who takes over as Bank of Japan governor. Former top financial bureaucrat Toshiro Muto was at one point mooted as the leading candidate, but other names have emerged in the past few days, such as Asian Development Bank President Haruhiko Kuroda and former deputy BOJ governor Kazumasa Iwata, both considered more radical than Muto, but not as radical as some fringe contenders.
- Central bank and governor policy, and its impact on the economy. Though there is goodwill towards Abe, his continued stay in office depends on results.
- International response to policy steps, particularly if they lead to further substantial weakening of the yen.
TOWARDS A TOUGHER DEFENCE POLICY?
In 2012, a chain of events set off by a bid by a nationalist Tokyo governor to buy disputed East China Sea islets from their private Japanese owner led to the biggest anti-Japan protests in China in years, and hit economic ties between Asia's top two economies.
The outpouring of anti-Japan sentiment has since died down, the two sides kept the stand-off from escalating into an all-out economic war, and military confrontation is in neither country's interest.
But with Japanese and Chinese patrol ships and fishing boats circling the waters off the islands, there is always a possibility that a collision or other incident could spiral into a bigger clash.
Another flare-up could again hit Japanese companies operating in China, leading to loss of output and prompting investors to cut their exposure to the Japanese stock market and other assets.
In February, Japan's Defence Minister said it has the right to develop the ability to launch a pre-emptive strike against an imminent attack given a changing security environment, though it had no plan to do so now.
Even a suggestion that Japan is trying to develop such a capability would seriously alarm neighbours China and South Korea, which have reacted strongly in the past to suggestions it might do so.
What to watch:
- Moves towards a more assertive defence and security policy.
- Potential marine confrontation. While Japanese coast guard and Chinese patrol and surveillance crews are well disciplined, fishing boats or activists on both sides could prove to be wild cards.
- Diplomatic efforts to improve relations. Beijing and Tokyo have maintained contacts though publicly they remain far apart.
- Whether the idea of bringing the issue for International Court of Justice arbitration can build any traction. Tokyo has rejected it, arguing its right to the islands is undisputable, but some commentators say arbitration could be the best way to end the impasse.
(Editing by Daniel Magnowski)