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US-Japan trade and the auto sector will be high on Abe's agenda as he claims victory at the polls

Key Points
  • Japanese Prime Minister Shinzo Abe's Liberal Democratic Party and its partner, the Komeito Party, won at least 69 of the 124 seats contested in parliament's 245-seat upper house, according to Japanese media reports.
  • Speaking on Monday after the election results, Abe pledged to make the economy his top priority and signaled that there could be more stimulus.
  • Another priority for Abe will be trade talks with the U.S., and a key issue will be Japan's auto industry, Martin Schulz, senior economist at Fujitsu Research Institute, told CNBC on Monday.
Japan Prime Minister and ruling Liberal Democratic Party President Shinzo Abe at an election campaign rally in Japan.
Tomohiro Ohsumi | Getty Images News | Getty Images

Japan's Prime Minister Shinzo Abe and his ruling coalition party might have won a majority in the country's upper house elections on Sunday — but they failed to secure enough votes needed for Abe's long-held dream of revising the constitution.

After the polls, analysts say the government will likely turn its focus on the economy and trade with the U.S., especially the Japanese auto sector.

Abe's Liberal Democratic Party and its partner, the Komeito Party, won at least 69 of the 124 seats contested in parliament's 245-seat upper house — with nine seats still to be called, according to Japanese media reports.

But the coalition fell short of the two-thirds "super majority" — or 85 seats — needed to revise the country's constitution in order to further legitimize its military, and end a ban that has kept its armed forces from fighting abroad since 1945, when World War II ended.

US-Japan trade

Speaking on Monday after the election results, Abe pledged to make the economy his top priority and signaled that there could be more stimulus.

"Uncertainty remains over the global economic outlook such as trade frictions and Britain's exit from the European Union. We'll respond to downside risks without hesitation and take flexible and all possible steps," he said.

"Based on a stable political basis, the Abe cabinet will take more aggressive and bold economic measures than ever," he added.

The fact that pro-constitutional revision forces lack a supermajority in the upper house after today's elections will not prevent Abe from continuing to push to revise the constitution before he leaves office.
Scott Seaman
Eurasia Group

Another priority for Abe after the elections will be trade talks with the U.S., and a key issue will be Japan's auto industry, Martin Schulz, senior economist at Fujitsu Research Institute, told CNBC on Monday.

Both countries are reportedly working on a trade deal which could involve Japan offering American farmers new access to its markets in exchange for Washington reducing tariffs on certain Japanese auto parts.

Such a deal would give Abe a win on autos, while helping Trump shore up support among farmers — an important constituency ahead of the 2020 presidential election.

The good news is that Abe looks to have widespread support on Japan's dealings with other countries, said Schulz. However he warned that tariffs would be bad for the autos industry, which is "fundamental" to Japan's economy.

"This is why this elections was so incredibly important for Mr Abe. It shows that the country is supporting him. Everybody knows after the elections, a major negotiation with the US is coming. You cannot touch the automobile industry, it is too big," Schulz said.

Japan has been bracing for U.S. curbs on auto imports as its trade surplus with the world's largest economy jumps —driven by exports of Japanese cars. That has sparked fears of more tariffs from Washington.

Japan's exports to the United States rose 4.8% in the year to June, up for the ninth straight month, driven by semiconductor-making equipment and cars, trade data showed.

Imports from the United States fell 2.5% in the year to June, causing Japan's trade surplus with the world's biggest economy to increase 13.5% from a year earlier to 669.9 billion yen ($6.21 billion).

Domestic issues

Abe's grip on power is set to continue, experts say, as he will likely persist in going after his dream of Japan's right to possess a military.

"The fact that pro-constitutional revision forces lack a supermajority in the upper house after today's elections will not prevent Abe from continuing to push to revise the constitution before he leaves office," Scott Seaman, director of Asia at Eurasia Group, wrote in a note on Sunday.

"Much of his attention in this area will focus on persuading more upper house members — such as politicians in the Democratic Party for the People — to support this cause," he said, referring to Japan's second-largest opposition party.

But, according to Seaman, Abe will not likely reach his goal by the end of 2020. That's in part due to "lukewarm support" from the Komeito Party, left-leaning opposition parties as well as the public, where "many people regard issues such as pension reform and strengthening the economy as more urgent priorities."

Opposition parties have focused on concerns over household finances, such as the impact from an upcoming 10% sales tax increase, and strains on the public pension system amid Japan's aging population.

— Reuters and Associated Press contributed to this report.