Abe Win Sets Up Next Battle as Japan Reform Fights Loom

Photographer: Tomohiro Ohsumi/Bloomberg

Shinzo Abe, Japan's prime minister and president of the Liberal Democratic Party (LDP), center, leaves after speaking to the media following an upper house election at the party's headquarters in Tokyo on July 21, 2013. Close

Shinzo Abe, Japan's prime minister and president of the Liberal Democratic Party (LDP),... Read More

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Photographer: Tomohiro Ohsumi/Bloomberg

Shinzo Abe, Japan's prime minister and president of the Liberal Democratic Party (LDP), center, leaves after speaking to the media following an upper house election at the party's headquarters in Tokyo on July 21, 2013.

Japanese Prime Minister Shinzo Abe’s ruling coalition faces the challenge of maintaining unity and public support after cementing control of both houses of parliament on a platform of economic revival.

Abe’s Liberal Democratic Party and its New Komeito ally now have 135 of the 242 seats in the upper house, according to estimates by state broadcaster NHK. The former ruling Democratic Party of Japan slid further into the margins of politics after its collapse in lower house elections in December, with the worst showing since its formation in 1998.

With the Diet avenues now cleared for the government’s bills, the fight for Abe, 58, turns inward. He needs to convince his enlarged party, and a public that turned out in fewer numbers yesterday, that his program of change is worth enacting. Vested interests are lined up against him on everything from making it easier to fire workers to entering a U.S.-led free-trade zone.

“The good news is the strong victory gives Abe immense political capital to implement” his platform, said Robert Feldman, head of Japan economic research at Morgan Stanley MUFG Securities Co. “The bad news is that immense political capital will be needed to overcome the vested interests. With a large majority, the coalition has no excuses, and so failure to act could bring strong market reaction.”

Yen Gains

The yen strengthened 0.6 percent to 100.08 yen against the U.S. dollar as of 3:40 p.m. in Tokyo after earlier rising as much as 1 percent. The Nikkei 225 Stock Average gained 0.5 percent as of the close.

The Topix Index (TPX) of stocks climbed 59 percent in the past eight months on optimism that Abe’s three-pronged economic strategy of monetary stimulus, a flexible fiscal stance and business deregulation will end two decades of malaise. The yen tumbled about 19 percent against the dollar in that time, helping exporters.

Abe has already seen how quickly investor sentiment can turn. When he delivered a speech previewing his structural reform agenda that did not contain hoped-for measures on labor market reform and corporate tax, the Topix tumbled 3.2 percent.

“Escaping 15 years of deflation is no easy matter, in fact you could say it’s a historic task,” Abe told reporters in Tokyo today. “We will focus on that. If we don’t have a strong economy, we won’t have a strong basis for our social security system. The same goes for diplomacy and security.”

Decision Time

Decisions loom on whether to cut corporate tax; reduce labor regulations dating from the 1960s that offered lifetime employment at larger enterprises; make it easier to consolidate agricultural land; allow greater access for foreign goods and services through the Trans-Pacific Partnership trade talks; streamline the approval of medical-industry products; restart nuclear reactors to cut energy costs; and address funding shortfalls in the social-security system.

He is already facing dissent. Hidehisa Otsuji, a former health minister who won an upper house seat for the LDP, vowed to challenge Abe over Japan joining the TPP, saying he would fight to “protect our culture from American market fundamentalism and neo-liberalism,” the Sankei newspaper reported.

“We do not promise to do anything that can’t be done,” government spokesman Yoshihide Suga told reporters in Tokyo in response to Otsuji’s remarks. “We will carry out our election promises. It’s true there will be various debates within the party.”

Debt Load

Abe must decide whether to proceed with a scheduled increase in sales taxes designed to pare the fiscal deficit in a nation with the world’s largest public debt burden. He said yesterday that question will be answered in the autumn, with economic data helping determine the call.

Turnout tumbled in the election, which coincided with the first weekend of school holidays. Only 52.61 percent of the electorate cast votes, the third lowest on record for an upper house election, according to the Ministry of Internal Affairs and Communications.

Abe is seeking to avoid falling into the trap of revolving door prime ministers that began in 2007 and led to the LDP’s ouster in 2009.

“I don’t think people are going to feel the effects of Abenomics in their wage packets in the next six months or a year,” said Katsuhiko Nakamura, executive director of Tokyo-based think tank Asian Forum Japan. “The problem will be how to make people feel progress is being made in the meantime.”

Vote Tallies

Half of the upper house seats were up for grabs. The LDP is set to win 65 seats to add to its existing 50, according to NHK. New Komeito is projected to win 11 seats for a total of 20, the broadcaster added, while the DPJ will win 17 seats, for a total of 59. The Japan Restoration Party, once seen as an up-and-coming force, was limited to eight seats, adding to its single current spot, NHK said.

Another choice for Abe is how much to focus on strengthening defense and revamping the U.S.-occupation era constitution. With China increasingly challenging Japan’s administration of the Senkaku Islands, known as Diaoyu in Chinese, the LDP has proposed building a Marines-style force and amending the pacifist constitution to legitimize Japan’s maintenance of armed forces.

Abe said yesterday on NHK he wanted to deepen the debate on constitutional change in a calm atmosphere. He said Japan’s door was open to talks with China and declined to say if he would visit the Yasukuni Shrine, which is dedicated to Japan’s war dead including leaders convicted as Class A war criminals by an Allied tribunal after World War II.

“I don’t think he will go to Yasukuni,” said Nakamura. “He has been saying that the door is open to talks with China. If he does go, that will look like empty posturing and will effectively close the door for the next year.”

Abe consolidating his grip on power may lead to Japan becoming a source of instability for the region and the world, China’s official Xinhua News Agency wrote in a commentary after the vote.

Wage Malaise

Angst over incomes may deepen should Abenomics deliver on its promise of inflation, without prompting companies to start increasing compensation.

Wages (JNLSUCTL) haven’t risen in Japan on a sustained basis since the bursting of the asset bubble in the early 1990s, as companies focused on fixing balance sheets and consumers reined in spending. Labor cash earnings fell 0.1 percent in May from a year before.

Among the burdens reducing the incentive for Japanese companies to invest at home is the second-highest level of effective corporate taxes in the Group of Seven nations, executives say. The nation’s 35.6 percent corporate tax rate compares with 25 percent in China, according to the Ministry of Finance. Only the U.S. has a higher rate at 39.1 percent, according to Organization for Economic Cooperation and Development data.

Abe, who took office as prime minister for the second time in December, has already overseen a recalibration of monetary policy. Abe installed inflation-target advocate Haruhiko Kuroda in March to head the Bank of Japan, and he followed through with an unprecedented plan to double the monetary base over two years.

Consumer Prices

Consumer prices excluding fresh food are forecast to rise 0.3 percent in June from a year before, the first increase in 14 months, based on the median estimate of economists surveyed by Bloomberg News before a July 26 report.

Meantime, slowing growth risks stoking dissent among LDP lawmakers just as Abe embarks on his reform legislation. Gross domestic product rose an annualized 2.8 percent in the three months through June, compared with 4.1 percent in the first quarter, a survey of 29 economists by Bloomberg indicates.

“Members within Abe’s LDP with vested interests will be against reforms -- especially on health care, pensions and agriculture,” said Takuji Okubo, chief economist at Japan Macro Advisors in Tokyo, who formerly worked at Goldman Sachs Group Inc.

To contact the reporters on this story: Isabel Reynolds in Tokyo at ireynolds1@bloomberg.net; Takashi Hirokawa in 東京 at thirokawa@bloomberg.net; Andy Sharp in Tokyo at asharp5@bloomberg.net

To contact the editor responsible for this story: Rosalind Mathieson at rmathieson3@bloomberg.net

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