The emergence of Yoshihide Suga as the leading candidate to replace Prime Minister Shinzo Abe suggests Japan will stick to its economic strategy of massive monetary stimulus, flexibility on fiscal spending and piecemeal reform as the logic of seeking stability in a crisis wins the day.
While Abe’s long-time right-hand man trails rivals including former Defense Minister Shigeru Ishiba in opinion polls, he boasts support from key factions within the ruling Liberal Democratic Party. A move Tuesday to limit the decision-making process to lawmakers likely favors Suga in the leadership contest, which is expected to be held around Sept. 14-15.
Whoever wins will need to make a solid start to reassure investors, business leaders and voters that the nation is in safe hands. After the initial shock of Abe’s decision Friday to resign due to health troubles, markets have stayed relatively calm, indicating they expect Japan’s economic policies to remain largely intact.
“I can’t overstate the importance of a quick, good start whoever wins,” said Hideo Kumano, chief economist at Dai-Ichi Life Research Institute. “Financial markets need to be assured about policy continuity and there is a huge public demand for the right handling of the pandemic.”
Suga, who served as Abe’s chief cabinet secretary, will hold a news conference Wednesday to officially declare his candidacy, local media including broadcaster TBS reported. On Tuesday, Ishiba and former Foreign Minister Fumio Kishida announced plans to also seek the party leadership post and become prime minister.
Any sign of a departure from the path of Abenomics could send the yen surging and stocks sliding, triggering a re-evaluation of the outlook for the nation. One of the first key economic decisions of the new premier will be the timing of a switch to stimulating a return to growth rather than focusing on life-support aid for businesses and households.
So far, the government’s support measures -- worth over 40% of gross domestic product in overall terms but closer to 10% in extra spending resources -- have kept unemployment and bankruptcies at remarkably low levels, alongside financing support from the Bank of Japan.
Still, the recovery from an annualized 28% cratering of the economy in the second quarter remains fragile, with consumption sputtering, exports still falling and business spending sliding the most in a decade. The economy is now smaller than it was when Abe took the helm.
Increasing economic activity while keeping infection numbers under control will likely call for a third extra budget later in the year or early next year, though it will be difficult to impress voters with size after so much support already.
The amount of extra spending will give an early indication of the new leader’s ability to extract funds from the finance ministry when Japan already has the developed world’s largest debt load. Abe took a flexible approach by reining in the budget deficit with tax increases while picking and choosing his moments to ramp up spending.
What Bloomberg’s Economist Says“A Suga win would cement continuity. A win by one of the others would spell pretty much the same.” --Yuki Masujima, economist
The BOJ’s massive monetary easing campaign to achieve 2% inflation was the most eye-catching pillar of Abenomics. While the importance of the price target had in recent years been played down by Abe compared with importance of creating employment, his successor is likely to keep the goal in place in name at least.
Some of Suga’s rivals have expressed concerns about the side effects on the banking sector of the BOJ’s stimulus. But with the government needing to borrow more to finance spending, the logic suggests none of the candidates will be willing to quickly push the central bank away from a policy that keeps lending at rock-bottom rates.
“The BOJ must absorb the pressure toward higher interest rates that comes from the government’s expansionary fiscal policy,” said Ryutaro Kono, chief Japan economist at BNP Paribas SA. “There won’t be any change in fiscal expansion and easy monetary policy.”
Even Ishiba, who is seen to have the clearest differences with Abe over policy, said Tuesday that he wouldn’t change monetary policy because of the negative consequences it risked.
Cheaper Phones
Suga has occasionally picked up themes of concern for the public. His insistence that mobile phone rates should be cheaper is among the clearest moves and may explain why Japanese telecom shares fell when Suga started to gain momentum in the party leadership race. Suga is also known for his vigilance over yen gains.
The new leader may not have time to make progress on some of the economy’s longer-term issues such as its ageing population and infrastructure, its lack of female empowerment and the widening split between its big cities and the regions before an election due by October next year.
Some economists cite a risk for not having someone like Abe in an international stage as Japan’s leader. Abe was well known, had been around for awhile and got along with US President Donald Trump, who labelled him the “greatest” leader in Japan’s history.
Beyond the security and political significance of Japan’s relationship with the US, dealings with the US president have important economic consequences in terms of trade and currency policy.
“The next prime minister will have to establish relationships from scratch with other leaders,” said Yoshimasa Maruyama, chief market economist at SMBC Nikko Securities. “The risk for a new leader is a destabilization in ties with other nations, especially with US”
