For Abenomics fans, the results of Japan’s snap election Sunday were sweet. Prime Minister Shinzo Abe’s ruling coalition has retained a two-thirds “super majority,” paving the way for him to become the nation’s longest-serving leader.
The win could give the nearly five-year old reflation programme a second wind. But there have been years of bold reform pledges from Abe, with inconsistent follow through. The risk is he uses this fresh mandate to revise the country’s pacifist constitution first, and take his time with reforms. That could deflate a long-running rally in Japanese stocks that has seen the Nikkei index rise 26.9 per cent since November 4, 2016.
The glacial pace of policy moves to loosen markets, cut red tape and catalyze entrepreneurship helps explain why Japanese wages are flat even though the country is enjoying its lowest unemployment rate in 23 years. The economy has grown for six straight quarters, the longest expansion since 2006, yet companies remain reluctant to share more profit with workers, or otherwise put their combined $2.7 trillion of cash reserves to work. Real wages rose just 0.1 per cent in August after falling 1.1 per cent in July, frustrating progress by the Bank of Japan toward its 2 per cent inflation goal.
Theoretically Sunday‘s results clear the way for Abe’s Liberal Democratic Party to get more aggressive on the economic front. Abenomics has three “arrows.” Arrow No 1, the Bank of Japan, is almost certain to maintain monetary easing, keeping the yen and bond yields under pressure. But monetary policy would have greater effect if the government would deploy the fiscal arrow by cutting the nearly 36 per cent corporate tax rate. So would making life easier for startups, loosening onerous labor regulations, and improving the utilization of the female workforce — which together comprise Arrow No 3.
Unfortunately, Abe has a deserved reputation for loose reform talk. His victory in 2014 inspired optimism that deep structural change was imminent, but instead Abe focused on re-writing the constitution. He still wants to amend Article 9, the constitutional clause preventing Japan from fielding a conventional military, as part of his legacy.
But decisively defeating Japan’s entrenched deflationary tendencies would win Abe a permanent place in the economic history books, and universal applause. All he needs to do is fire away.