Japan's Next PM Piles Pressure on Central Bank

Shinzo Abe, incoming Prime Minister of Japan.
Yoshikazu Tsuno | AFP | Getty Images

Japan's next Prime Minister Shinzo Abe, buoyed by a landslide election victory, piled pressure on the central bank on Monday as it prepared for a policy meeting, saying voters had overwhelmingly backed his call for more aggressive monetary stimulus.

Abe said once he formed his cabinet on Dec. 26, he would instruct ministers to produce a joint statement with the Bank of Japan that will give it a 2 percent inflation target, double the current goal.

The ex-premier, who won a second chance to lead the nation after his conservative Liberal Democratic Party (LDP) surged back to power in Sunday's election, also vowed to improve what he called strategic relations with China while standing firm on sovereignty of islands controlled by Japan but claimed by Beijing.

Abe campaigned calling for "unlimited" monetary easing by the BOJ and promising a surge in public spending to snap the world's third-biggest economy out of its fourth recession since 2000 and persistent low-grade deflation.

(Read More: Japan's Deflation Battle – Why This Time Is Different)

"It was very rare for monetary policy to be the focus of attention in an election, but there was strong public support to our view," Abe, wearing a black suit and a pink tie, told his first post-election news conference. "I hope the Bank of Japan takes this into account (at its policy meeting this week)."

NHK public TV said on Monday the LDP had won 294 seats in the 480-member lower house. Its ally the New Komeito party won 31 seats, giving the two the two-thirds majority needed to over-rule most matters in the upper house, where no party has a majority. Turnout hit a post-war low of just above 59 percent, according to media estimates.

Security policy and strained relations with Japan's neighbours was another key theme of Abe's campaign and the conservative leader reiterated there was no doubt that uninhabited East China Sea islands were Japanese territory.

And while he vowed to work "persistently" to improve relations with Beijing through dialogue, he said it called for a strategic approach, putting ties with China in the context of Japan's relations with the United States and Asia-Pacific.

"We need to deepen ties with the rest of Asia including India and Australia, and not only diplomatically, but in the fields of security and energy, before starting to work on improving ties with China," Abe said.

While Abe is expected to make his first trip to Washington sometime early next year, the immediate focus is on his promises of big-scale monetary and budget stimulus, dubbed "Abenomics."

The first installment is due this week, with the BOJ seen boosting its asset buying programme at the end of its two-day meeting on Thursday. That would mark its fifth policy easing since it adopted a 1 percent inflation target in February and vowed to step up efforts to end deflation and shield the export-dependent economy from the impact of the strong yen and global economic slowdown.

Not Enough

But Abe has been saying it was not enough, calling for more vigorous steps. Shortly after Sunday's vote that brought the LDP

back to power just three years after a crushing defeat, Abe proposed to resurrect a policy panel his rivals scrapped in 2009, which would serve as a venue of policy coordination with the BOJ chief.

That would serve as an institutionalized venue to keep the central bank under pressure, though from April onwards Abe will be working with a new BOJ governor that he will pick and who is widely expected to be more dovish than incumbent Masaaki Shirakawa.

Hopes that the new government can overcome parliamentary gridlock that has plagued Japan for the past five years and expectations of a potent mix of ultra-loose monetary policy and an extra budget of up to 10 trillion yen ($119.76 billion)cheered investors.

The yen, whose persistent strength has dogged struggling "Japan Inc" including flagship companies like Toyota and Sony, extended its month-long retreat hitting a 20-month low at one point, while stocks rose and bond prices eased.

With an upper house election due later this year, analysts said Abe did not have much time to make good on his promises.

"If he doesn't deliver a feel-good factor by the July election, the LDP will get trounced," said Jesper Koll, head of equity research at JPMorgan Chase in Tokyo.

While Abe spoke of the popular mandate for his policies, analysts cautioned that Sunday's vote was more a damning verdict on the brief reign of Prime Minister Yoshihiko Noda's Democratic Party of Japan (DPJ) than an embrace of Abe's agenda or the party that had ruled Japan for most of the past 50 years.

The DPJ, which swept to power with a promise to break up the "iron triangle" linking the powerful bureaucracy, big business and LDP lawmakers, crashed under the weight of dashed hopes.

The party, hit by defections before the vote due to Noda's unpopular plan to raise the sales tax, captured less than a fifth of its 2009 tally. Noda promptly resigned as party leader.

"In a word, rather than a huge victory for the LDP, this election was a massive defeat for the Democrats," the Nikkei business daily said in an editorial.

Analysts said Abe would be well advised to focus on the economy for the time being and steer clear of divisive issues such as revising Japan's 1947 pacifist constitution.

Taking Note

Abe, who quit as premier in 2007 citing ill health, appeared to be taking note, telling the news conference he would like to focus first on lowering the threshold of votes required to change the constitution.

The soft-spoken grandson of a prime minister, Abe will also have to prove he has learned from the scandals and charges of incompetence that plagued his first administration and need all the fine touch to handle thorny relations with Beijing.

Beijing's foreign ministry said the disputed islands belonged to China but it hoped Japan would appropriately deal with problems in mutual relations.

"We think the most pressing issue is that Japan must show sincerity and take practical steps to appropriately deal with the present situation and work hard to resolve the issue and improve relations between the two countries," said foreign ministry spokeswoman Hua Chunying.

But Chinese media were more bellicose.

"When Abe takes power, the Chinese should take real action to immediately set him straight," said a commentary in Global Times, a popular tabloid published by the same group that runs the Communist Party's People's Daily. "If he takes excessively hardline action against China, we should resolutely fight back."