TOKYO/NEW YORK -- With the announcement of his resignation, Japanese Prime Minister Shinzo Abe became the first leader of a major economy to step down amid the coronavirus pandemic. The Nikkei Stock Average's 2.6% plunge that followed reflects international concern over the risks that may lie ahead for the nation's politics, security and economy.
When word of Abe's resignation arrived just after 2 p.m. on Friday, every staffer at the Finance Ministry's Administration and Legal Division, which handles dealings with the Diet, rose to their feet.
"We don't know what will happen," a grim-faced senior official said. "We have no choice but to hold our breaths and wait."
Japan's most powerful ministry is running full steam ahead toward the September-end deadline for drafting the fiscal 2021 budget. On everyone's mind was how the new cabinet and the choice of top ruling party officials will affect the process.
The pandemic-pummeled economy looks increasingly reliant on loose monetary policy and fiscal spending, the first two of Abenomics' so-called three arrows. The third -- structural reform -- failed to develop into the centerpiece it was meant to be.
The half-decade economic recovery that began on his watch ended in 2018. And while the Nikkei average temporarily climbed to above 24,000 this year from the 10,230 where it had languished when Abe became prime minister for a second time in 2012, April-June gross domestic product shrank a real annualized 27.8% -- the worst on record in data going back to 1955.
The government is ramping up spending, paid for with new debt being bought up by the Bank of Japan.
Regulatory reform has been slow, and such traditional labor practices as lifetime employment remain firmly entrenched, making it tougher to shift talent into promising new fields. An aging society and a shrinking birthrate continue to chip away at the workforce.
The Cabinet Office estimates that Japan's potential growth rate remains below 1%.
Analysts agree that the Abe government's longevity gave the prime minister clout both at home and abroad.
"Abe's historic contribution to Japan was that he proved that regime change can lead to a stable administration," said Izuru Makihara, a professor in politics and administration at the University of Tokyo. With this political capital, he pursued a "free and open Indo-Pacific" strategy and strengthened ties with the U.S. by introducing national security legislation allowing collective self-defense of allies, Makihara said.
Abe's exit could hold geopolitical implications at a time when Sino-American tensions have spilled over from trade to the armed forces. China fired four ballistic missiles into the South China Sea this week, the month after the U.S. announced for the first time that it rejects China's maritime claims in the waters.
"The Indo-Pacific security landscape may be in for a gigantic shake-up," tweeted Derek Grossman, senior defense analyst at the California-based RAND Corp. With Abe stepping down, "the region will lose an important advocate for the policy of competing with and countering China throughout the Indo-Pacific and globally," he told the Nikkei Asian Review.
"And Japan won't be the only country with a new, uncertain foreign policy," Grossman said. Abe's close relationship with U.S. President Donald Trump, as well as with Australian Prime Minister Scott Morrison and Indian Prime Minister Narendra Modi, made him in many ways the linchpin of the Quadrilateral Security Dialogue, or Quad, that has become increasingly anti-China in recent months, Grossman said.
Patrick Cronin, the Asia-Pacific security chair at the Hudson Institute think tank in Washington, said: "Prime Minister Abe has been a driver and intellectual force behind a free and open Indo-Pacific region. His close rapport with a populist American president has ameliorated some doubts about U.S. leadership and reliability."
While being supportive of U.S. policy, Abe "has also not been afraid to carve out a greater and more independent role for Japan," Cronin said. "And he has also known when and how to intervene to persuade President Trump to avoid missteps, whether over diplomacy with North Korea or China or the need to support regional partners."
Whether Abe's successor can have such rapport with the American leader is an open question.
"We want to thank Prime Minister Abe for his outstanding leadership as Japan's longest continuously serving prime minister. Together with President Trump, Prime Minister Abe has made the United States-Japan alliance, and our overall relationship, the strongest it has ever been," a senior U.S. government official told the Nikkei Asian Review.
"Prime Minister Abe's vision of a free and open Indo-Pacific aligns closely with the president's, and by working together, our two great nations have significantly advanced this shared vision. We look forward to working with Prime Minister Abe's successor in further strengthening our nations' ties and advancing our shared goals," the official said.
Leading Japanese national security expert Yuichi Hosoya, a professor in international politics at Keio University, said Abe's retirement will inevitably throw Japanese politics into further chaos. "Those at the core of the government who want to see it continue down the same path and those who were left out in the cold will likely clash, intensifying the power struggle within the Liberal Democratic Party," he said.
Noting that long-serving governments are more preferable for raising Japan's international standing and conducting foreign policy to its advantage, Hosoya also pointed out that they typically tend to be followed by governments with short runs.
"After the long reign of Prime Minister Yasuhiro Nakasone, his successor, Noboru Takeshita, did not last long," he said. "After Junichiro Koizumi, Abe's first term was short-lived."
From the late 1980s, Japan installed eight prime ministers in just nine years.
"The next prime minister will have a massive amount of work to do," said Yuri Okina, who chairs the Japan Research Institute.
"The coronavirus pandemic will make work more flexible through telecommuting and offer a rare opportunity to correct the overconcentration of people and business in Tokyo," she said.
Additional reporting by Alex Fang in New York.