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School scandal brings political risk to Japan

Markets watch closely as Abe's Teflon coating wears thin

Moritomo Gakuen head Yasunori Kagoike's testimony Thursday has caused more headaches for Prime Minister Shinzo Abe.

TOKYO -- The scandal over a shady land sale to a nationalist school operator has dealt a rare blow to Japanese Prime Minister Shinzo Abe's government, unnerving investors counting on continued political stability.

Getting out of hand

The issue boils down to whether an 800 million yen ($7.19 million) discount on land sold to Moritomo Gakuen by the government was appropriate, and whether any political figures were involved in the sale or the approval process for the school to be built on the plot. If politicians did play a role and money changed hands, that could be considered graft.

Moritomo Gakuen chief Yasunori Kagoike alleged political involvement when he testified Thursday before the Diet, but this has been denied by officials who led finance bureaus involved in the deal. Yet government explanations have not cleared up public doubts about the process or the sale price.

"It's a shame that this couldn't bring the matter to a close," a senior government official said after Kagoike's testimony.

The prime minister's office led the effort to bring Kagoike before the Diet, seeking to highlight contradictions in his claims. Yet the administrator did not budge even while under oath, putting the onus on the government to explain the sale as well as the role of Abe's wife, Akie.

After the scandal broke, Abe said he would resign as prime minister and as a Diet member if he or his wife were found to have any connection to the sale or the school approval. This stance may come back to haunt him if Akie Abe did give 1 million yen to the school as Kagoike alleges, or if the Finance Ministry facilitated the deal inappropriately.

Akie Abe has a reputation as something of a maverick. Should she be called to testify, information unknown to the prime minister's office could emerge.

Few good options

Chief Cabinet Secretary Yoshihide Suga, who handles crisis management for the government, is frustrated that he cannot keep the situation under control. Among the main sources of consternation at the prime minister's office are two key players proving difficult to manage: Kagoike and the independent first lady. This has left the government dithering over what to do.

One option for concluding the scandal swiftly would be to press charges against Kagoike, likely accusing him of perjury in his testimony or questioning inconsistencies in construction costs listed on forms he submitted to government agencies. This would shift the battleground from the Diet to the courtroom. But some in the government have voiced concerns about the potential for a protracted legal dispute over matters such as the land sale.

Abe also could dissolve the lower house for a snap election, as he did in 2014 -- following resignations from his cabinet -- to seek a mandate to delay a consumption-tax hike. A Nikkei poll shortly before the dissolution put the cabinet's approval rating at 48%.

The next such poll is due out Sunday. "We're not worried about approval ratings," a senior government official said, while acknowledging that it would be a different story if support fell below 40%.

Abenomics at risk

Domestic and foreign investors are taking a keen interest in the scandal. The Japanese government under Abe has stood out as a rare bastion of stability compared with Europe and the U.S., where rising populist sentiment has created political risks. While this has encouraged foreign investment in Japan, that money could flow back out should confidence in the administration waver.

Investors seem to be keeping their cool for now. On Friday, the day after Kagoike's testimony, the Nikkei Stock Average climbed 177 points to close at 19,262. "Stock markets don't see the Moritomo scandal as that big a risk," said Mutsumi Kagawa of the Rakuten Securities Economic Research Institute.

But that may change if public opinion turns against the administration and a political deadlock ensues. Hopes for Abenomics would fade. "The Nikkei average could drop to around 18,000 quickly," warned Yoshihiro Ito of Okasan Online Securities.

Investors are watching the scandal as an indicator of how markets will move as the new fiscal year begins April 1.

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