TOKYO Dec 17 Even before Japanese voters
returned Shinzo Abe's party to power, he had already won over
financial markets with an economic revival plan as seductively
simple as economists say it is risky: print money and spend it.
Lots of it.
The Liberal Democratic Party's landslide on Sunday is likely
to sustain a market rally fuelled by economic stimulus hopes,
but Abe's economic legacy will probably be defined by how he
tackles chronic ills that easy money alone cannot fix and that
were largely ignored during the campaign.
The conservative leader set to return to the prime
minister's post he abruptly left in 2007 campaigned on a promise
to double spending on public works and to push the Bank of Japan
for radical action to end deflation and help exporters such as
Toyota and Sony by taming the yen.
"The fact that Abe points to changes in the BOJ law or forex
levels, or aggressive easing as solutions to Japan's problems
is, if anything, worrying," said Yuuki Sakurai, chief executive
of Fukoku Capital Management which manages $19 billion in
"They should be treated as tools to buy time to implement
structural reforms, but we're not hearing anything about deep
reforms that the LDP wants to carry out."
The so-called Abe trade - a 4 percent slide in the yen
and more than a 10 percent rise in stock prices
over the past month - shows that for now, most investors just
want to see the new leader fulfil his pledges.
Analysts said they expected Sunday's vote, which according
to TV projections based on counted votes gave LDP and its ally a
two-thirds lower house majority, to sustain that trend in the
"Abe's economic policies will be implemented so the economy
will improve next year. The problem is what happens after that,"
said Koichi Haji, chief economist at NLI Research Institute in
Tokyo. "The key is whether Abe can implement long-term
structural reforms and growth strategies."
The BOJ is poised to heed Abe's calls for more aggressive
easing and a more ambitious 2 percent inflation target, with
markets expecting the central bank to ease policy for the fifth
time this year on Thursday.
Investors also expect an extra budget of up to 10 trillion
yen ($120 billion) as a down payment on Abe's plan to spend such
amounts per year over the next decade - double the current level
- on public works long synonmous with the LDP.
Economists say pumping cash into the economy will only give
it a temporary jolt if not followed by efforts to lift its
growth potential and contain runaway debt.
In just three decades Japan has become the world's oldest
society, with those 65 or above making up nearly a quarter of a
population that is greying and is estimated to have shrunk by
over 260,000 in the last fiscal year alone.
Recipes to cope with it are well known: social security
overhaul, including cuts in healthcare and pensions; boosting
access to overseas markets and opening Japan to foreign goods,
workers and investment; power sector revamp and bringing more
women into the workforce.
All, however, carry political and social risks that Japan's
recent revolving-door leaders were unable or unwilling to take.
Left to sink or swim with swings in overseas demand for its
exports and its currency, the world's third-largest economy has
been in and out of recession and dogged by low-grade deflation
for the past two decades.
Now, in firm control of the lower house, Abe has a chance to
prove his mettle and erase the memories of his first troubled
year in office.
So far he has played it safe.
His "Abenomics" -- a mix of potent monetary stimulus and big
public spending -- carries little political cost and he has been
coy on touchy issues such the U.S.-led Trans-Pacific
Partnership (TPP) free trade pact, or implementing sales tax
With some luck, the new government may be even be able to
call an end to a brief recession it entered last quarter.
Economists polled by Reuters last week predict the economy
will start growing again in the first quarter of next year,
largely due to expected recovery in China, Japan's top export
Abe's first stern economic test will come after August, when
the government, armed with second-quarter data, will decide
whether the economy is strong enough to go ahead with a first
round of planned sales tax increases.
With 10-year bond yields near a decade low below 0.7
percent, bond investors are now confident that he can steer the
central bank to buy more bonds from the world's most indebted
government without setting off a market meltdown.
To keep that trust, Abe must convince investors that in his
push for big scale-stimulus, he has not abandoned budget
discipline. Economists say with Japan's public debt at more than
twice its economic output and climbing, the new government can
ill-afford delaying a tax hike that has become a symbol of
Tokyo's fiscal rectitude. Their message is clear: "Just do it!"
"I hope they will go through with it," said Takatoshi Ito, a
Tokyo University professor, former adviser to the first Abe
administration who is now mooted as a possible successor to BOJ
Governor Masaaki Shirakawa when his term ends in April.
"Tax revenue is less than half of expenditures. Bond
issuance is bigger than tax revenues. It's like using a credit
card for more than half of your monthly expenditure. It's crazy,
abnormal, you can't go on like that."