Shinzo Abe Approved as Japan’s Prime Minister by Parliament

Japan’s parliament confirmed Shinzo Abe as the nation’s seventh prime minister in six years, returning him to the office he left in 2007 after his party regained power in a landslide election victory last week.

The lower and upper houses of parliament approved Abe’s nomination in Tokyo today. Former prime minister Taro Aso will be finance minister in Abe’s administration, Chief Cabinet Secretary Yoshihide Suga told reporters in Tokyo.

Abe, 58, faces a recession, a diplomatic dispute with China and an election for control of the upper house that’s seven months away. The new prime minister has already had an effect, with the yen falling around 6 percent since mid-November on his pledges to boost fiscal spending and force the Bank of Japan (8301) to do more to end deflation.

“If voters get the sense that the economy is improving, he is likely to win in the upper house and he will have a more stable administration,” said Harumi Arima, a Tokyo-based independent political analyst.

The yen slid through 85 per dollar today for the first time since April 2011. As of 4:58 p.m. in Tokyo, the currency was 0.7 percent weaker at 85.34. The Nikkei 225 Stock Average (NKY) closed up 1.5 percent, heading for its seventh week of gains.

The currency’s advance to a postwar high last year eroded the competitiveness of Japan’s exporters and contributed to concern the nation’s manufacturing is hollowing out.

Economic Contraction

Gross domestic product shrank at an annualized 3.5 percent pace in the three months through September after a contraction in the previous quarter, meeting the textbook definition of a recession. The median estimate of analysts surveyed by Bloomberg News is for a 0.5 percent contraction this quarter. Exports slid for a sixth month in November.

Abe agreed with his coalition ally Natsuo Yamaguchi of the New Komeito Party yesterday on a policy package that includes “bold monetary easing” to reach an inflation target of 2 percent, bolstering his party’s position in the lower house.

With New Komeito backing a cornerstone of Abe’s economic platform, the LDP is also in a better position to campaign for July elections in the upper chamber, where the party lacks a majority.

“Abe is proving that his strong words during the campaign were not just rhetoric,” Brown Brothers Harriman & Co. currency strategists, led by Marc Chandler in New York, wrote in a note this week. Abe has called for “unlimited easing” to reach the goal for consumer price increase, and for increased spending on public works.

Inflation Target

The New Komeito party had cautioned in the campaign before this month’s election that forcing the central bank to reach a 2 percent inflation target risked undermining its independence.

The agreement with New Komeito also calls for a “large” extra budget for the current fiscal year to March 2013 and deregulation of the energy, environment and health care sectors. The parties agreed to seek nominal gross domestic product growth of 3 percent, without giving a timeframe for the goal.

With Japan’s economy repeatedly lapsing into contraction in recent years, burdened by an export-driven growth model and a shrinking population at home, the country has been unable to escape the deflation that became entrenched in the late 1990s. Consumer prices excluding fresh food, a benchmark monitored by the central bank, haven’t advanced 2 percent for any year since 1997, when a national sales tax was increased.

Open-Ended Stimulus

One Bank of Japan policy maker had embraced the idea of open-ended monetary stimulus as early as last month, according to a record of the Nov. 19-20 board meeting released today in Tokyo. The unnamed member said that open-ended easing until the central bank achieves its 1 percent inflation goal is one option, the minutes of the meeting showed.

The BOJ held off from adding to stimulus at the gathering after having done so in October and September. The bank last week boosted its asset-purchase fund by 10 trillion yen ($117 billion), bringing it to 76 trillion yen. The facility, which buys assets including government and corporate debt, is the bank’s main policy tool to lower borrowing costs as the benchmark interest rate is near zero.

The LDP and New Komeito said they would work to strengthen Japan’s alliance with the U.S. and to secure sufficient funds for the armed forces and coast guard to ensure the defense of Japan’s territory, according to the statement.

Foreign Policy

Security has been a point of point of contention between the partners, with Yamaguchi saying in an interview on Dec. 6 that any drastic rise in Japan’s defense spending would be “undesirable.”

Abe has said that without more resources for defense Japan is at risk of losing control of disputed islands known as Senkaku in Japan and Diaoyu in China. Incursions by Chinese vessels and an airplane near the uninhabited islands in the East China Sea have raised tensions in recent months.

The LDP victory marks a personal comeback for Abe, who quit as premier in 2007 after a year in office, citing a stomach ailment.

To contact the reporters on this story: Takashi Hirokawa in 東京 at thirokawa@bloomberg.net; Isabel Reynolds in Tokyo at ireynolds1@bloomberg.net

To contact the editor responsible for this story: Peter Hirschberg at phirschberg@bloomberg.net

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