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Abe timed yen redesign for maximum political effect

Riding on Imperial accession, prime minister eyes summer election and tax hike

Prime Minister Shinzo Abe unveiled new bank notes now to take advantage of the celebratory mood surrounding the ascension of a new emperor.

TOKYO -- The announcement of the Japanese bank note redesign Tuesday followed a carefully prepared script with heavy political calculations by Prime Minister Shinzo Abe and top government officials, looking to capitalize on the ascension of a new emperor and the unveiling of the next Imperial era name.

The Finance Ministry, led by Taro Aso, had worked on the plan in secrecy since the idea surfaced in spring 2018. It was Abe and Aso, Abe's deputy prime minister and a close ally, who made the final calls on the new designs and the timing of the announcement.

"My approval rating should be safe from here on out. Now I can focus on diplomacy," Abe apparently told aides after the discussions wrapped up.

This diplomacy likely refers to Abe's efforts to resolve a long-running territorial dispute with Russia and finally settle the issue of Japanese citizens abducted by North Korea decades ago.

The finance minister began hashing out the plan with Abe in earnest early this year. The thinking was that revealing the new notes in early April -- between the April 1 announcement of the Reiwa era and the new emperor's accession May 1 -- would foster a celebratory mood. This positive sentiment could give Abe and his party a boost ahead of Diet upper house elections in the summer and a shield against an unpopular consumption hike in October.

The government's approval rating has already improved since the era name was revealed. A Kyodo survey conducted April 1-2 put support for Abe's cabinet at 52.8%, up 9.5 percentage points from the previous survey in March.

For the Finance Ministry, this was a chance at redemption. The ministry has suffered many scandals in recent years, from sexual harassment allegations against a top official to the falsification of documents surrounding a shady land sale involving a friend of the prime minister.

The ministry's longtime goal of raising the consumption tax rate to 10% from the current 8% to bolster the nation's coffers has twice been postponed under Abe, who feared that the hikes could push the country into recession.

Announcing the new note designs a full five years ahead of the actual change -- the 20-year cycle had the next revamp scheduled for 2024 -- makes for an unusually long run-up. Though Aso cited the need to allow time to prepare for printing and to make the necessary updates to equipment such as vending machines, few were inclined to take this explanation at face value.

The redesign also comes as the world is moving away from cash. Japan itself has vowed to boost cashless payments to account for 40% of shopping -- on par with current levels in the U.S. and Europe -- by 2025.

"Eliminating the 10,000 yen bill would have encouraged a shift to cashless," said Takahide Kiuchi, a former Bank of Japan policy board member now at Nomura Research Institute.

But Tokyo concluded that doing so might have caused turmoil in a country where cash remains king. Even as China's total currency in circulation fell 2% on the year at the end of February as mobile payments gained ground, Japan's supply grew 30% between 2008 and 2018. The total amounted to 20% of gross domestic product in 2016, compared with 8% and 6% in the U.S. and South Korea, respectively.

The differing trends owe partly to the stashes of cash -- an estimated 50 trillion yen ($449 billion), or half of all money in circulation -- that Japanese households keep at home, instead of bothering with the paltry returns at banks. The government hopes that the note redesign will pull these funds from under the mattress and into the economy to promote consumption and investment.

Meanwhile, the impact of the redesign on businesses remains uncertain. The last change spurred a wave of demand for new ATMs and other equipment, but these are less necessary now that systems can be updated remotely for compatibility with new bills.

Glory, a maker of cash sorting machines, enjoyed a revenue increase of 90 billion yen over three years from the 2004 revamp. The company's Tokyo-listed shares surged by the daily limit at one point Tuesday before ending the day up 7.9% at 2,893 yen.

But printer and ATM maker Oki Electric Industry said the impact of the redesign on revenue is "unknown at this time." A representative of Komori, which supplies printing presses to Japan's National Printing Bureau, said the company could not comment on new demand from the change.

Toshihiro Nagahama, chief economist at Dai-ichi Life Research Institute, estimates the bill redesign will create 1.3 trillion yen in added value, equivalent to a 0.1 percentage-point boost to growth. This is likely to be eclipsed by normal year-to-year variation -- the economy expanded 1.5% in real terms in fiscal 2017 and shrank 0.4% in fiscal 2014.

"The impact is not large enough to determine the direction of the economy," Nagahama concluded.

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