Abe Success on BOJ Boosts Comeback as Japan Election Looms

Prime Minister Shinzo Abe is riding a popularity wave unseen by six immediate predecessors as he pushes his Bank of Japan nominees through a divided parliament, raising the odds of the ruling party winning a July election.

Buoyed by a surge in the benchmark stock index to a 4 1/2 year high -- spurred by his anti-deflation policy -- Abe has the highest approval ratings since Junichiro Koizumi stepped down in 2006. This week he may secure his biggest achievement since he took the helm in December, with the largest opposition party signaling it will back Haruhiko Kuroda for BOJ chief.

With analysts from Citigroup Inc. to Barclays Plc raising growth forecasts, an improving economic outlook gives the ruling Liberal Democratic Party tailwinds heading into elections for Parliament’s upper house, which it doesn’t control. A win may bring an end to an annual revolving-door of leaders, and give Abe a mandate to pursue free-trade talks opposed by farmers.

“This will be seen as a significant victory for his inflation-targeting policies and for his political skill,” said Gerald Curtis, a professor of Japanese politics at Columbia University in New York, referring to approval of the BOJ picks. “It’s probably enough for him to win convincingly in the upper house election. Now the question is what he will do when he gets to the really hard issues, like structural reform.”

The last time the LDP held a majority in both Diet houses was during the 58-year-old Abe’s first term as prime minister, in 2006-2007. In December, he led the party to victory in the lower house pledging to fire “three arrows” into the economy to end two decades of stagnation.

Kuroda’s Support

His first shot is poised to hit home, with Kuroda, who has backed greater monetary stimulus, today completing confirmation hearings. Lawmakers in Democratic Party of Japan, which makes up the largest party in the upper house, last month indicated they will vote for Kuroda. The Diet also must vote on academic Kikuo Iwata and BOJ staffer Hiroshi Nakaso as deputy chiefs.

Abe has also introduced a 10.3 trillion yen ($107 billion) fiscal stimulus package as the second point of his three-part plan. The third step is to cut regulation to give businesses greater incentives to invest and hire. His political skills will be tested as he seeks to implement plans outlined in a Feb. 28 speech to reduce record debt, give more autonomy to local regions and restructure Japan’s bureaucracy.

Among the most controversial initiatives would be joining negotiations for a U.S.-led regional trade agreement, a step members of his own party including former defense chief Gen Nakatani have opposed. Nakatani said on his website last month it would have “immeasurable effects on agriculture.”

TPP Benefits

The so-called Trans-Pacific Partnership now includes 11 nations. Japan’s participation would boost its gross domestic product by as must as 3.2 trillion yen, according to a 2010 government study.

Abe, who discussed the talks with U.S. President Barack Obama last month, said last week that “it’s in Japan’s interest to pursue free trade” and that he won’t take too much time before making a decision on the TPP. The ruling party holds its annual convention at the end of this week.

American automakers oppose Japan’s participation unless it eases barriers, and Japanese farmers argue the deal would mean the collapse of their industry should a 778 percent rice tariff be scrapped.

“Abe’s policies seem to be appealing to urban businessmen,” said Aiji Tanaka, a political science professor in Tokyo at Waseda University. “If he pushes through the TPP, he will start losing traditional LDP support,” he said, referring to the rural districts that underpinned the party’s half-century domination of Japan’s politics before it was upended by the DPJ in 2009.

Broad Support

For now, the prime minister enjoys broad support, with his approval rating at 75.8 percent in a poll published by broadcaster Tokyo Broadcasting System today, almost unchanged from last month. The poll of 1,200 people was carried out on March 9 and 10 and the margin of error was 2.8 percent.

Investors also have applauded. The Nikkei 225 Stock Average has risen 27 percent and the yen is down 13 percent since the LDP landslide in December. Adding cheer is a turnaround in the economy -- fourth quarter GDP rose an annualized 0.2 percent, and will increase 2 percent this quarter, a Bloomberg News survey of economists indicates.

Meantime, the DPJ’s landslide defeat has left it reluctant to confront Abe. The party ousted the LDP in 2009 only to see initial public inspiration evaporate as it repeated the former ruling party’s record of revolving-door leaders, Cabinet reshuffles, gaffe-driven ministerial resignations and campaign-finance scandal.

DPJ Collapse

“The DPJ has in effect collapsed, they can’t be unreasonable anymore,” said Minoru Morita, an independent political analyst in Tokyo. “They were severely criticized by the public in the election and they’ve decided not to oppose appointments in most cases.”

An upper house victory would give Abe more than three years before facing the electorate again, making him the longest-serving premier since Koizumi. Today’s TBs poll found that 37.5 percent of respondents planned to vote for the LDP in July’s vote, compared with 8.1 percent for the Democrats.

Abe quit after a year his first time as prime minister, plagued by party scandals and pleading ill health. While an election victory will mark another point of redemption, he must grapple with Japan’s record debt and the impact of a planned increase in the five percent sales tax starting next year.

“I think the real battle comes after the election,” said LDP lawmaker Masahiko Shibayama. “What will he do about spending cuts and the pain that will come from easing regulations? He has strong support, but trust could disappear rapidly if he gets this wrong.”

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