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Japan's Abe kicks off cabinet reshuffle

Kazuhiro Nogi | AFP | Getty Images

Japan's Prime Minister Shinzo Abe on Wednesday picked two lawmakers with friendly ties to China for his party's top posts, a move seen to be aimed at thawing chilly ties with Beijing.

Abe tapped outgoing Justice Minister Sadakazu Tanigaki, his predecessor as LDP leader, for the key party post of secretary-general, the LDP's de facto election campaign chief.

69-year-old Tanigaki is from a moderate wing of the LDP that favors better ties with China. He was also behind a plan to hike the sales tax in two stages to curb Japan's huge public debt.

Meanwhile, veteran lawmaker Toshihiro Nikai, 75, who also has close ties with China, was appointed to a second top party post. Outgoing administrative reform minister Tomomi Inada, 55, a close conservative ally of Abe, became LDP policy chief.

Read MoreJapan's polarizing PM Abe learns the long game

The change in Abe's Liberal Democratic Party (LDP) is part of a broader leadership rejig, including a cabinet reshuffle, which is aimed at strengthening party unity and polishing Abe's image.

LDP's approval rating has fallen to 43.5 in an August survey, the lowest level since Abe's election in December 2012.

"Abe's decision to reshuffle his Cabinet suggests that he is eager to improve on his centripetal power and to win at the local governor's election for the rest of this year and the nationwide local election next spring," said Junko Nishioka at UBS.

Local elections will kick off under Abe's reshuffled cabinet in Fukushima on 26 October; the nuclear issue would be the top concern.

"LDP failure in the local election in Fukushima, would increase the fragility of Abe's Cabinet and would be a compelling motivation for overall reform," Nishioka noted.

Read MoreWhy Japan's economy is stuck in 'no man's land'

As widely expected, Abe retained Yoshihide Suga, Taro Aso, and Akira Amari in the key posts of Chief Cabinet Secretary, Finance Minister, and Economy Minister, respectively.

Analysts point to the promotion of Liberal Democratic Party (LDP) Deputy Policy Chief Yasuhisa Shiozaki to Minister of Health, Labour and Welfare (MHLW), as a market-friendly move.

"Mr. Shiozaki is one of the most aggressive reformers in the LDP. He has been particularly vocal about the need to reform the Government Pension Investment Fund (GPIF) and strengthen Japanese corporate governance," said Izumi Devalier, Japan economist with HSBC.

"Markets are expected to rate Shiozaki's appointment positively as it raises the likelihood of deep pension reforms," she added.

New traction in Abenomics?

"Abenomics," Abe's radical policies to revive Japan's economy, has been in question recently, after a string of data showed a growth slowdown, and calls for further traction on reforms and monetary policy easing have gone unheeded.

The controversial sales tax hike, which saw nationwide consumption tax raised to 8 percent from 5 percent in April, was also criticized by many as counter-intuitive to Abe's push to reboot the economy.

Asia's second-largest economy shrank an annualized 6.8 percent in the three months to June, its worst contraction since 2011, as higher tax payments weighed heavily on consumer demand.

Read MoreJapan shows sharp contraction in second quarter

Hopes are high among investors that the cabinet reshuffle will give Abenomics a renewed boost. The Nikkei built on Tuesday's gains to rise 0.4 percent on Wednesday. Japan's benchmark index has been a market laggard this year, after soaring 57 percent last year.

"These personnel changes, alone, do not guarantee that the PM will be able to overcome vested interests and deliver much needed reforms in areas such as social security, labor markets, and public pension management," said HSBC's Devalier.

But she adds that it shows Abe is serious about pushing his reform agenda forward.

"Prime Minister made some smart moves with this cabinet reshuffle. He has managed to place genuine reformers in key posts, ensured continuity in his basic economic program, and neutralized the risks that party infighting will derail policymaking or threaten his re-election as LDP President in September 2015," Devalier said.

"Prime Minister has given himself more time, and a more powerful set of players to advance his reform agenda," she added.

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