World Economy

The world's third-largest economy may be derailed by a rising political crisis

Key Points
  • Japanese PM Shinzo Abe is facing a severe political scandal and it's not clear if he can survive the rest of his term, raising questions over the future of Abenomics
  • Abe is now expected to prioritize his image instead of long-awaited structural reforms
The world's third-largest economy may be derailed by a rising political crisis

As the leader of the world's third-largest economy battles an acute crisis of confidence, questions over his future and his namesake economic program loom large.

Public backlash over suspected cronyism on the part of Japanese Prime Minister Shinzo Abe has pushed support for the 62 year-old to under 30 percent — his lowest level ever.

Since May, the Liberal Democratic Party head has been accused of helping Kake Gakuen, an educational institution headed by a longtime friend of Abe's, win approval for a veterinary school in a special economic zone. The PM has denied granting any favors but the affair — his second school scandal this year — still cost the ruling LDP a historic defeat in July's Tokyo assembly election.

Abe's popularity has also been weighed down by general disillusionment with his leadership and issues at the defense ministry: Last week, former Defense Minister Tomomi Inada resigned over concerns she helped conceal records that exposed the dangers faced by Japanese peacekeepers in South Sudan.

A rally against Japanese Prime Minister Shinzo Abe in front of parliament in Tokyo on July 25, 2017.
KAZUHIRO NOGI / AFP / Getty Images

The PM is now due to reshuffle his cabinet in a bid to strengthen ratings but it's not yet clear whether he can remain in office until the LDP presidential election in September 2018.

"There is now a real chance that Mr. Abe will be out of office before the next legislative elections," Capital Economics said in a recent note. "Should he leave office, one of the most important questions for investors is whether his plan to revitalize Japan's economy, commonly known as Abenomics, will go down with him."

Reform momentum stalled

Fiscal policy, monetary easing and structural reforms make up the three pillars of Abenomics. Tokyo has delivered on the first two, but the latter remains in progress. But as Abe's political clout weakens, reforms are now expected to take a backseat as the embattled leader concentrates on restoring his reputation.

Japan Inc.'s role in growth

"The scandal is a serious threat to Abenomics because the approval rate fell even before important reforms were implemented," said Kohei Iwahara, economist at Natixis Japan Securities. "The government needs a high approval rate from the citizens to implement the necessary reforms, which could inflict pains to its citizens through job losses."

Indeed, Abe now has less ability to move controversial structural reforms — known as the Third Arrow — through the political process, explained Tobias Harris, Japan vice president at Teneo Intelligence.

"Strong public support gave Abe political capital with which to pursue controversial reforms, but it also made him reluctant to use his political capital lest he risk his public support. Now, with his support falling, it's that much harder for Abe to take risky policy decisions."

Key reforms still pending include changes in the labor market to increase wages and social security incentives to boost female participation in the work force.

As of late, "the Third Arrow has run out of steam with no major reforms on the agenda," Capital Economics said. "As such, while we don't have high hopes for structural reform if Mr. Abe stays in office, nor do we if he were to leave."

President Donald Trump and Japanese Prime Minister Shinzo Abe at the White House on February 10, 2017 in Washington, DC.
Mario Tama | Getty Images

Could Abenomics continue without Abe?

No stranger to transgressions, Abe cut short his first term in office back in 2007 amid a series of scandals in his cabinet. But even if history repeated itself this time, Abenomics is still expected to survive.

"The same old bottle will simply be relabeled from Abenomics to XXnomics, with XX being the new PM's name," said Iwahara. "Unfortunately, there is no meaningful policy debate in Japan that can be an alternative to Abenomics, so the important ingredients of Abenomics will remain intact."

Should Abe depart before the end of his term, foreign minister Fumio Kishida is likely to be his successor, projected Harris.

"Having served under Abe, Kishida will be hard pressed to abandon Abe's legacy entirely. He has articulated a mild critique of Abenomics focused on inequality issues, but this would lead to a kinder, friendlier Abenomics rather than a decisive break with Abenomics."


Markets could question sustainability of Japan PM's 'Abenomics': Market researcher

Markets could question sustainability of Japan PM's 'Abenomics': Market researcher