Abe Win Sets Up Next Battle as Japan Reform Fights Loom

Japanese Prime Minister Shinzo Abe’s winning of the first bicameral majority for the ruling coalition in six years sets up an internal government battle as he seeks to revamp economic to defense policies.

Abe’s Liberal Democratic Party and its New Komeito ally will have at least 133 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 -- 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 important thing for Abe is to quell opposition in his own party -- the opposition are no fear for him,” said Shuichi Obata, a senior economist in Tokyo at Nomura Securities Co., a unit of the nation’s largest brokerage. “Speed is extremely important for Abe, so that markets don’t feel he has let them down with the growth strategy. He has to satisfy them within a month,” using time before parliament resumes session to prepare his legislation, Obata said.

The yen was trading at 99.91 per dollar at 9:05 a.m. in Tokyo, up 0.7 percent from before the election. The Nikkei 225 Stock Average opened 0.7 percent higher.

Stock Market

The Topix Index of stocks has 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 has tumbled about 19 percent against the dollar in that time, offering exporters a more competitive exchange rate.

Abe has already seen how quickly investor sentiment can turn. When he delivered a speech previewing his structural reform agenda that omitted details and showed no legislation would be planned for months, the Topix tumbled 3.2 percent.

Decisions loom on whether to cut the corporate tax burden; reduce labor regulations dating from the 1960s that offered lifetime employment at larger enterprises; make it easier to consolidate agricultural land; allow greater access to 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.

Sales Tax

Abe must also 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. The prime minister yesterday said that question will be answered around the autumn, with economic data helping determine the call.

Turnout tumbled in the election, which coincided with the first weekend of school holidays. The Asahi newspaper estimated the share of voters casting ballots at 52.6 percent, down from 57.9 percent in 2010 and the lowest in an upper chamber election since 1995.

“It’s not like there’s a groundswell of enthusiasm for him,” said Koichi Nakano, professor of politics at Sophia University in Tokyo, in reference to Abe. “If he misreads that and gets complacent, he could be punished very quickly in cabinet support levels.”

Vote Tallies

The LDP won 34.9 percent of the proportional representation vote with 89 percent of ballots tallied, the Asahi reported. This is up from 24.1 percent in the 2010 upper house ballot, according to the internal affairs ministry. The DPJ picked up 13.5 percent of votes, according to the Asahi, down from 31.6 percent in 2010. Competing for the first time, the Japan Restoration Party won 11.8 percent of the vote, and the Japanese Communist Party took 9.7 percent.

Half of the upper house seats were up for election yesterday. The LDP is set to win at least 64 seats which, added to its existing 50, will make 114, according to NHK. New Komeito is projected to win at least 10 seats, making a total of a minimum 19, the broadcaster estimated late last night.

The DPJ will win at least 15 seats, for a total of about 57, NHK calculated. The Japan Restoration Party, once seen as an up-and-coming force, was limited to seven seats, adding to its single existing upper house seat, NHK said.

“This is a powerful message telling me to proceed with my economic policies,” Abe said on NHK after polls closed. “I want to make sure people feel the effects of the economic recovery as soon as possible.”

Island Dispute

Another choice for Abe is how great a focus to place 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 buying first-strike weapons such as cruise missiles. The party also has proposed amending the pacifist constitution to legitimize Japan’s maintenance of armed forces.

Abe said yesterday on NHK that he wanted to deepen the debate on constitutional change in a calm and stable atmosphere. He said Japan’s door was open to talks with China and declined to say whether he would visit 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.

National Security

In Fukushima City, capital of the prefecture devastated by the March 2011 tsunami and ensuing nuclear reactor meltdowns, voters showed interest in both economics and national security.

“My expectations are for foreign policy,” said Masahiko Kanno, 67, who said yesterday he voted for the LDP. “We should take a firm stance toward China and South Korea on territorial problems, history and so on,” he said. Japan is also enmeshed in a dispute with South Korea over the administration of the Dokdo Islands, known as Takeshima in Japan.

Tomoko Kida, a 27-year-old company employee on maternity leave, said her focus in voting for the LDP was on the economy. “Share prices are rising, but no one around me is feeling the benefit. I want him to introduce some policies that raise wages.”

Wages 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 their spending. Labor cash earnings fell 0.1 percent in May from a year before.

Wage Malaise

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

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 and 17 percent in Singapore, 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.

“We want corporate taxes in line with other nations,” Hiroshi Tomono, chairman of the Japan Iron and Steel Federation and president of Nippon Steel & Sumitomo Metal Corp., said at a gathering of industry leaders last week in Karuizawa, northwest of Tokyo.

Abe, who took office as prime minister for the second time in December after leading the LDP to victory in lower house elections, has already overseen a recalibration of the nation’s monetary policy. He installed inflation-target advocate Haruhiko Kuroda in March. Kuroda 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.

“Abe has a window of opportunity to undertake real reforms” if he’s willing to use his political capital, said Takuji Okubo, chief economist at Japan Macro Advisors in Tokyo, who formerly worked at Goldman Sachs Group Inc. “Members within Abe’s LDP with vested interests will be against reforms -- especially on health care, pensions and agriculture.”

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