TOKYO -- Japan's government worries that the U.K.'s decision to leave the European Union could deal a body blow to Abenomics by throwing the virtuous cycle of a soft yen and rising stock prices into reverse, with potential consequences for next month's upper house election.
Prime Minister Shinzo Abe held a meeting of relevant ministers Friday evening, giving direction to Finance Minister Taro Aso and Economic and Fiscal Policy Minister Nobuteru Ishihara as well as to the absent industry and foreign ministers.
"We want to cooperate as the Group of Seven host nation while working to [promote] the growth of the global economy," Abe said on broadcaster TBS that night.
One might call crisis response a specialty of Abe's administration. It can turn problems to its advantage by reacting quickly and appropriately, fostering public trust. Many in the ruling coalition observe that the government's approval rating rises in troubled times.
Abe stressed that the Brexit vote vindicated his decision to delay a consumption tax increase that had been scheduled for next April. The joint statement released after last month's Group of Seven summit in Japan called a U.K. withdrawal from the EU a "further serious risk to growth." The idea that the tax hike delay is a way to brace for such risks to the global economy, rather than a failure of Abenomics, looks more convincing now.
A top LDP official argued that the timing of this shock -- coming as it does soon before the upper house election on July 10 -- is good for the ruling coalition. "We can appeal to the need for political stability," the official said.
The fact that Abe ended up making the right call on the tax hike will strengthen his leadership position, a young lawmaker said.
But that will not be the case if the crisis does serious damage to the real economy. An aide to Abe, seeing that the yen had strengthened beyond 100 to the dollar, admitted that this will likely be a headache for the government. If the soft yen and stock market rally that had supported Abenomics vanish while growth strategies continue to fall short, the administration will inevitably lose support.
"The more the yen strengthens and shares fall, the stronger the backlash for the ruling coalition" in the election, a top LDP official said.
"The atmosphere could change completely," another LDP lawmaker said. "It's an unpleasant feeling."
LDP Secretary-General Sadakazu Tanigaki called Friday for the government to join hands with the Bank of Japan and the business community to take all possible steps to deal with the strong yen and slumping stocks. Natsuo Yamaguchi, leader of coalition partner Komeito, urged follow-through on policies to minimize obstacles to consumer spending.
The Council on Economic and Fiscal Policy will convene soon to work out a response. It is ready to consider a second supplementary budget for this fiscal year in preparation for an economic slowdown. The LDP is increasingly eyeing a big fiscal spending package, with a midlevel lawmaker advocating a more than 10 trillion yen ($97.8 billion) budget.