Peter Tasker: After an election win, get ready for more Abenomics
Japan's PM is in position to finally deliver on his signatures economic policies
So it is five big wins in a row for Japanese Prime Minister Shinzo Abe. His impressive victory in the lower house election on Oct. 22 follows two earlier lower house successes and two in votes for the upper house.
All this puts 63-year-old Abe in a strong position to secure another term as head of the ruling Liberal Democratic Party next autumn. If he continues in the job until 2021, as now seems probable, he will become Japan's longest-serving prime minister since the dawn of the parliamentary system in the 1880s.
Crucially for investors, this means an extended lease on life for the "Abenomics" reflationary policy regime under which the Nikkei Stock Average has soared from an extraordinarily depressed level to a 21-year high.
It is not yet known whether Bank of Japan Gov. Haruhiko Kuroda, who has overseen an easy money program, is willing to serve another five-year term himself. If not, it is highly probable that his successor will be a reflationist in the Kuroda mold. The nightmare scenario of a premature tightening of monetary and fiscal policy, bringing with it a resurgent yen and a return to deflation, is now far less likely than if Abe's decision to call an early election had backfired.
Next on the Abe agenda is the necessary but politically contentious reform of the pacifist constitution the U.S. imposed on Japan after World War II, which has been treated as holy writ for seven decades.
With the ruling coalition having retained its two-thirds majority in the Lower House, the prime minister has the necessary parliamentary strength to push through a bill for initiating constitutional reform. But winning a simple majority in a national referendum -- as is also required -- is a trickier proposition for a leader with limited personal charisma. To maximize his chances, he will need the kind of public support that comes with a powerful "feel good" factor at street level.
That has yet to happen. The Tokyo stock market is in maximum bullish mode, and the central bank's Tankan survey of business sentiment shows confidence at its highest level since the last hurrah of the bubble economy in 1992.
Yet consumers remain cautious. Indeed, the Economy Watchers Survey -- which incorporates the views of hairdressers, taxi drivers and pachinko parlor operators, among others -- peaked just before the government hiked the consumption tax in 2014 and has gone nowhere since.
Fortunately for Abe there is every chance that, barring sudden squalls in the global economy, the next phase of his Abenomics project will deliver progressively better news to the household sector. The driver will be Japan's structural labor shortage, which is likely to intensify over the next few years, leading to higher wages and, ultimately, rising inflation. The combination of strong nominal GDP growth and super-low interest rates should prove increasingly stimulatory.
SHORTAGE-DRIVEN REFORM At first glance, such an outcome seems unlikely. After all, Japan is far from being alone in experiencing a long period of solid economic growth with quiescent inflation and little improvement in wages. Most of the developed world is in the same boat.
Yet observers may be underestimating the potential for new factors to come to bear. First, the deflationary pressures of globalization are easing -- Chinese unit labor costs in manufacturing are now practically on a par with Japan's. Second, low-paid workers and others who believe they have suffered from globalization are putting pressure on politicians in the U.S. and western Europe for more active fiscal policies and, in some countries, income redistribution. Thirdly, with populations aging in the developed world, the pool of potential new entrants to labor markets is not infinite, especially if mass immigration is checked.
In Japan's case, that last point is vitally important. The "part-time ratio" (the percentage of part-timers in the workforce) appears to have peaked already. The job-offer-to-applicant ratio for full-time employees (a standard measure of labor market tightness) has exceeded one for the first time ever -- there are now more offers than applicants. If business conditions remain buoyant, wages must rise.
Conventionally, labor shortages and rising wages are a threat to corporate margins and, eventually, economic health. In the case of Japan, however, the opposite may be true. As labor becomes scarcer and more expensive, managements will need to use it more efficiently. Ultimately, this will mean more investment in automation and more corporate restructuring and mergers and acquisitions.
In other words, some of the structural reforms that were supposed to be part of the "third arrow" of the Abenomics package will be put in place not by government fiat but by organic economic processes. A quick glance at the structure of the Japanese banking system -- and indeed at the inside of any bank branch, with its ranks of paper-shufflers -- will demonstrate how much room for improvement exists.
MANDATE FOR GROWTH What about fiscal policy? Abe fought the election on a platform that included a proposal to hike the consumption tax. Never a fiscal hawk himself, he may have felt pressured by his dip in popularity over the summer into offering something to the more hawkish factions in the LDP. Now that his political position is secure, he can row back as much as he likes. The anti-tax hike Party of Hope, founded by Tokyo Gov. Yuriko Koike, could provide the excuse. Abe needs Koike's support on constitutional reform, and scrapping the tax hike would be a useful quid pro quo.
Some may worry about the risk of another bubble, but with the Nikkei index no higher than it was in 1987 and real estate prices subdued in all except prime Tokyo areas, that seems a premature concern. A more pressing issue is how to deal with the North Korean threat. In the short term, liaising closely with the U.S. is the only solution. Over time, Japan will have to build up its own anti-missile capability, which will further challenge the postwar legacy of pacifism.
In a world in which mainstream political parties are under pressure -- with even the previously invulnerable Angela Merkel damaged by the success of the populist right-wing Alternative for Germany -- Japan's political stability stands out like a beacon in a sea of fog. Abe's electoral success is the product of his generally effective pro-growth policies. Four more years of the same should confirm Japan's exit from deflation and return to the global stage as a major player.
Peter Tasker is an analyst with Tokyo-based Arcus Research.