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Abu Dhabi, UAETuesday 19 June 2018

Japan leader in a strong position to reboot Abenomics

But Economic success now has a new focus and immediate improvement is unlikely, analysts say

The Bank of Japan building in Tokyo, Japan. Kim Kyung-Hoon/Reuters
The Bank of Japan building in Tokyo, Japan. Kim Kyung-Hoon/Reuters

As far as most of the outside world is concerned, what matters about the outcome of Japan's national election on October 22 is that it appears to give the prime minister Shinzo Abe another try at boosting his signature "Abenomics" policies and at recharging the world's third-largest economy.

Abenomics has not been a spectacular success since the mix of monetary and fiscal stimulus plus structural reforms was launched in 2013. But it has prevented the economy from falling back into the repeated recessions it suffered in prior decades.

A second attempt to soup-up Abenomics will be launched by the Japanese leader now that he is flushed with success from the election victory. But economic stimulus in Japan at this time is a means to a different end and no sudden spurt in economic growth can be expected, analsyts suggest.

"Abe is trying to create a legacy," says Jesper Koll, the head of the equities fund Wisdom Tree Japan. "His first legacy project was to get the economy out of deflation and the second is to change [the Japanese] constitution," using growth to sweeten the controversial change," he tells The National.

Mr Abe and his Liberal Democratic Party together with the party's governing coalition partner, Komeito, won what was widely described as a "landslide" win in the October lower house election, securing the "super majority" needed to launch a national referendum on constituional change.

But the vote was more a verdict on the poor election tactics of a divided political opposition in Japan. So great was popular cynicism over these tactics that voters opted to support an agenda that will even include raising Japan's very unpopular national consumption tax in 2019.

Mr Abe has promised to proceed with a scheduled sales tax increase unless the nation's economy suffers a shock as big as the 2008 collapse of the investment bank Lehman Brothers. The plan is to divert some of the proceeds to child care and education via THIS IS ILLEGIBLE***agrowth suppring **** "investment in education."

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The fiscal impact on an already highly indebted Japanese central government could be very damaging, some argue. But with a compliant Bank of Japan (BOJ) headed by the governor Haruhiko Kuroda willing, in effect, to finance government deficits, Mr Abe appears unconcerned by international concern on this score.

Meanwhile, some analysts including Mr Koll also remain unfazed by the debt issue and are optimistic about the outlook for the Japanese economy. "Political and policy stability is poised to add momentum to Japan’s domestic business investment cycle," he says.

"Already leading companies like Canon and Shiseido have announced some on-shoring, ie building new production capacity in Japan and the upgrade cycle for small and medium sized companies is poised to accelerate further."

Japanese monetary policy "is poised to decouple from the US Fed rate hike cycle", Mr Koll suggests. "No matter who is appointed as next BOJ governor [will] almost certainly continue the current support for Abenomics from the central bank.

"The election has strengthened 'Team Abe's conviction that its economic policy is on the right track, precisely because of Japan’s unique collaboration between fiscal and monetary authorities. Japan's policy dynamics are poised to deliver strong upside surprises to economic growth."

Even so, Mr Abe will need to guard against assuming that a strengthening Japanese economy is a mandate to enter the dangerous territory of constitutional change, some say.

"I think that debate in parliament will begin" on this issue, Zentaro Kamei, a senior researcher at the think tank PHP Institute and a former member of Mr Abe's LDP has been quoted as saying.

"If Mr Abe "starts talking about the constitution, people will say: 'You didn't ask me that.'"