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Abe's on track to win at the polls, but he needs to spend more to fix Japan's economy: Analyst

Key Points
  • Incumbent Prime Minister Shinzo Abe's ratings declined after a pension report released in June by a government agency warned that many retirees in Japan will not be able to live on pensions alone. 
  • Political stability will be retained in the country, they say, amid a slowing economy.
  • That's sparking speculation that Japan's central bank could embark on more monetary easing, such as lowering interest rates.
  • But Bank of America Merrill Lynch's Izumi Devalier says it's time for the government to rely more on fiscal spending.
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Japan will go to the polls this weekend, and analysts are expecting the ruling coalition to win again — an outcome that would maintain political stability in the country amid a slowing economy.

"According to most polls, it looks like (Liberal Democratic Party) and (Komeito Party) will comfortably retain their majority ... the political stability is still going to be there," Izumi Devalier, head of Japan economics at Bank of America Merrill Lynch, told CNBC on Friday.

Incumbent Prime Minister Shinzo Abe's ruling coalition — the LDP and its partner, the Komeito party — currently has the upper house majority of 147 out of 242 upper house seats. There are 124 seats up for grabs in the upper house election on Sunday.

Japan's Prime Minister Shinzo Abe is applauded during the ruling liberal Democratic Party leadership election at the party's headquarters in Tokyo on September 20, 2018.
MARTIN BUREAU | AFP | Getty Images

A pension report released in June by a government agency warned that many retirees in Japan will not be able to live on pensions alone. The report gave his opponents ammunition to criticize Abe's government.

"Abe's approval ratings have declined due to negative public reaction to recent revelations about the adequacy of the national pension system, but his ruling coalition remains on track to secure enough seats in upper house elections on 21 July to maintain a comfortable majority in that chamber," Scott Seaman, director of Asia at Eurasia Group, wrote in a note.

Meanwhile, Japan's economy is slowing. Exports have declined while inflation fell in June to a two-year low, sparking speculation that the central bank could embark on more monetary easing, including lowering interest rates.

Still, Bank of America Merrill Lynch's Devalier told CNBC that it was time for the government to rely more on fiscal spending.

Years of aggressive easing from the Bank of Japan have already pushed borrowing costs to or below zero, straining commercial banks' margins.

"So far under Prime Minister Abe, there's just been an excessive reliance on monetary policy to reflate the economy. I think going forward ... we need to see more effective use of fiscal policy if downside shocks materialize," Devalier said.

— Reuters contributed to this report.