© Reuters. FILE PHOTO: Japanese Prime Minister Shinzo Abe stands in front of the Japanese flag after the annual party congress of the ruling Liberal Democratic Party (LDP) in Tokyo, Japan, March 5, 2017. REUTERS/Toru Hanai/File Photo
by Leika Kihara
TOKYO (Reuters) – The death of Shinzo Abe, the namesake of Japan’s “Abenomics” policy, made any direct challenge to his legacy highly unlikely, but could ultimately allow Prime Minister Fumio Kishida to phase out Abe’s government spending and monetary stimulus measure.
In a rare episode of political violence that has rocked the nation, Japan’s longest-serving prime minister was shot dead on Friday as he campaigned for Sunday’s parliamentary elections, as his party’s coalition expanded its majority in the upper house.
Analysts say Kishida is unlikely to do anything immediately that could anger lawmakers loyal to Abe, who leads the largest faction in Kishida’s Liberal Democratic Party (LDP) after stepping down as prime minister in 2020.
But ultimately his absence and the LDP’s victory in Sunday’s election, aided by Abe’s sympathy vote, could give Kishida the political capital to change the direction of policy.
Two days after Abe’s assassination, Kishida’s LDP-led conservative coalition is set to increase its majority in the upper house in an election.
People close to Kishida said the prime minister and his aides wanted to move toward normalizing fiscal and monetary policy and to gradually scale back the Abenomics experiment that was launched nearly a decade ago.
“Abenomics may not be reversed quickly and there will be no exit from ultra-easy monetary policy,” said Koya Miyamae, senior economist at Sumitomo Mitsui Banking Corporation Nikko Securities.
“But in the longer term, given issues such as a weak yen, the BOJ has to consider some form of adjustment to its monetary policy,” he said. “This would mean that a former or current BOJ executive would remain a strong candidate for the next central bank governor.”
Kishida, who belongs to the smaller LDP faction, remains under pressure from Abe and his supporters to maintain massive stimulus and pick a reflationary dovish as the next BOJ governor in April.
Abe’s absence could shift the balance of power within the party, undermining the influence of support for large government spending and ultra-easy central bank policy.
“Abe leads a group of inflation-minded ruling party lawmakers to support big spending, so his absence will have a huge impact on the party’s balance of power,” said Daiju Aoki, chief Japan economist at UBS Sumi Trust Wealth Management.
power balance shift
Abe deployed his “three arrows” in 2013 — aggressive monetary easing, flexible fiscal spending and a long-term growth strategy — with overwhelming public support for his push to move Japan out of chronic deflation.
Massive stimulus pushed by Bank of Japan Governor Haruhiko Kuroda has helped reverse the yen’s relentless appreciation, which has hurt Japanese exporters, boosted share prices and improved business confidence. However, economists have criticized the lack of credible growth strategies and reforms to help the economy shift into a higher gear sustainably.
So far, Kishida has stuck to Abenomics, deploying huge spending plans to cushion the economic blow from the COVID-19 pandemic and, more recently, soaring energy and raw material costs.
He also backed the Bank of Japan’s ultra-low interest rate policy, even as other central banks raised rates, pushing the yen to two-decade lows.
“When we look at Japan’s gross domestic product, corporate profits and employment, it’s clear that Abenomics has produced huge results. What matters now is driving wage growth,” Kishida said on Sunday’s TV show.
Ultimately, Kishida may seek to roll back some of Kuroda’s aggressive currency experiments that have strained financial institutions’ profits and weakened bond market pricing.
The Kishida government has been forced to downplay Japan’s commitment to a balanced budget amid strong opposition from Abe and his allies. Abe’s death could pave the way for Kishida to focus more on reining in Japan’s government debt burden, which is the largest in the industrial world.
“Abe is the standard bearer of those who support fiscal expansion. These people have lost momentum,” said Miyoshi Takayama, a professor at the National Institute for Policy Studies. “I wouldn’t say Kishida is rock solid in the party, but he’s more likely to have better control of the party now than before.”
While the BOJ is unlikely to reverse ultra-easy monetary policy anytime soon, the waning influence of pro-growth lawmakers could also affect Kishida’s choice of BOJ governor.
At the end of his second five-year term, the prime minister has the final say on who will succeed Kuroda.
Career central bankers Masayoshi Amamiya and Hiroshi Nakaso are seen as strong candidates, with Amamiya seen as taking a more dovish stance than Nakaso, who has warned about the downsides of prolonged monetary easing.
“Abe is said to prefer inflation-prone BOJ governors. Changes in the ruling party’s power balance could affect the choice of BOJ governor,” said UBS Sumi’s Aoki.