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A fresh mandate will enable Prime Minister Shinzo Abe to press ahead with his economic agenda.
Politics

Abe gets go-ahead on economy, prompting unease over constitution

Spending plans could be used as bargaining chip for Article 9 revision

TOKYO -- Victory for Prime Minister Shinzo Abe's ruling bloc in Sunday's elections has paved the way for him to press ahead with his economic policies. But there are growing concerns that the prime minister's focus on revising Japan's postwar constitution could hinder the implementation of much-needed economic reform.

With a renewed mandate for his signature Abenomics policy and the ruling coalition now holding a majority on every standing committee in the lower house, the prime minister will likely press ahead with fiscal spending and plans to divert increased consumption tax revenue toward providing free education.

The Liberal Democratic Party and its junior coalition partner Komeito intend to put together a 2 trillion yen ($17.6 billion) spending package by the end of the year to significantly increase spending on education and child care.

Roughly 1.7 trillion yen of the funds will come from the additional 5.6 trillion yen brought in by raising consumption tax from 8% to 10% in October 2019. On Sunday, Abe said this would take place "as stipulated by law, as long as there isn't an economic shock on the scale of the Lehman crisis."

Balancing the books

The proceeds of the tax hike had previously been earmarked for the repayment of national debt, and Abe's new plans could complicate attempts at fiscal reform. To avoid accusations of letting fiscal discipline slide, the government will need to make sizable cuts elsewhere in next year's budget, most notably from benefits and services for the elderly.

That may prove a difficult sell, however, with Abe having campaigned on a policy of "social security for all generations." The government is set to postpone a target of reaching a primary surplus in fiscal 2020, and fiscal consolidation remains a long way off.

Continuation at BOJ

Many market participants expect Abe's victory will lead the Bank of Japan to continue with large scale monetary easing for the foreseeable future.

The tenure of current BOJ Gov. Haruhiko Kuroda, the man behind the bank's aggressive monetary easing policy, comes to an end next year, but the markets seem to think he will be reappointed or someone with a similar stance will take his place.

The yen is set to remain weaker against other currencies, as economists from Merrill Lynch Japan Securities noted, "As the likelihood of Gov. Kuroda's reappointment or replacement by a similar dove has grown, the yen is likely to remain as a preferred funding currency in global financial markets."

Energy

Energy policy is also expected to remain much as it was. The Abe government will continue pushing for nuclear power plants to resume operation as a way of reducing dependence on fossil fuels and restoring balance to the country's energy mix. Operations at Japan's nuclear plants were suspended after the March 2011 disaster at a Tokyo Electric Power Co. Holdings facility in Fukushima as safety regulations were tightened.

But victory for the coalition does little to make the process of restarting them easier for utilities companies. Even if a plant passes the Nuclear Regulation Authority's more stringent safety checks, it must overcome local opposition.

Trade negotiations

Nor will the result make it easier for Japan to have its way on trade policy. The prime minister is set to meet with U.S. President Donald Trump in Tokyo on Nov. 6 and will then gather with leaders of countries involved in the Trans-Pacific Partnership in conjunction with the two-day Asia-Pacific Economic Cooperation summit  in Vietnam starting Nov. 10.

Japan's four main economic bodies -- the Japan Business Federation, the Japan Association of Corporate Executives, the Japan Chamber of Commerce and Industry and the Japan Foreign Trade Council -- will ask the government on Monday to press for a conclusion of the TPP without the U.S., and for an agreement to be reached at the APEC summit meeting.

Japan hopes to reach a broad agreement to reignite the TPP among the 11 countries that remain following Washington's withdrawal. But Trump could also press Abe for a bilateral trade pact when the two meet -- a demand Tokyo would find difficult to reject out of hand.

Growth strategy

In the nearer term, Abe has designated the three years through fiscal 2020 a period of productivity reform and intensive investment to spur growth. The economy and finance ministries are weighing tax cuts for corporations that offer strong employee education programs, which could be included in fiscal 2018's omnibus tax reform legislation. It is hoped that encouraging investment in human resources will improve labor productivity.

The government has also stated an intention to lay the groundwork for the commercialization of next-generation technologies such as automated driving, commercial drones and innovation in financial technology. The plan is to create "regulatory sandboxes" within national strategic special zones where certain rules can be suspended, making it easier to experiment.

Constitution

The risk to all these economic policies will be how much attention Abe pays to his goal of achieving constitutional reform. Even free education -- a program supported by all of the main parties -- could be used in negotiations with other parties over revision of the constitution.

"As the election victory will renew support for Abe within the LDP, we think the focus of Japanese politics is likely to be on implementing the constitutional reforms," said Takashi Miwa and Hisao Matsuura at Nomura Securities.

"As constitutional debate gathers pace, we have some concerns whether Diet discussions of bills will proceed smoothly. The current administration appealed to improved economic indicators during the election campaign, and we are concerned that talking points for the results of growth strategies appear to have been exhausted."

Nikkei staff writer Shotaro Tani in Tokyo contributed to this article.

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