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Reaction to the Japanese Liberal Democratic Party leadership election

October 2021

Sree Kochugovindan, Senior Research Economist, abrdn Research Institute

Following Japan’s Liberal Democratic Party leadership election Sree Kochugovindan, Senior Research Economist, abrdn Research Institute provides the following thoughts.

Continuity beckons for Japan under Kishida premiership

Fumio Kishida will be appointed Japan’s prime minister in an extraordinary session of the Diet on October 4 after being elected president of the ruling Liberal Democratic Party (LDP). The former foreign minister is seen as a continuity candidate. His cabinet picks will provide early insight into policy direction, although factional politics could complicate decision-making.

Kishida’s focus in the near term will centre on the path to recovery from Covid-19 and announcement of a new package of fiscal measures signalled to be in excess of ¥30 trillion ($268 billion). He is expected to roll out redistribution of household income. Structural reforms may be less of a priority, given that deregulation has been widely blamed for increasing inequality.

Consensus-building

Since former PM Yoshihide Suga resigned amid waning popularity, the LDP has enjoyed a partial recovery in polls. However, faced with losing seats in the upcoming Lower House election, it will need to expand its coalition beyond the current partnership with conservative party Komeito.

New appointments to the cabinet, and its factional balance, will be fascinating to watch in early October. Leading candidates to become LDP president, Kono and Sanae Takaichi, are expected to be offered positions. The role of Takaichi in particular will be of interest given her bold stance on fiscal policy and reflation.

The Lower House election looks set to take place on November 7, 14 or 21. The latest it can be held is November 28.

Energy policy

Kishida remains committed to carbon neutrality and sees nuclear power as a green energy option, with plans to invest in nuclear fusion, hydrogen fusion and compact electric furnaces. He favours restarting existing safe nuclear power plants and constructing new reactors over the medium term.

Despite fiscal expansion plans, Kishida is targeting a balanced primary budget by 2025. Former PM Shinzo Abe promised something similar without achieving it. It seems equally unlikely under Kishida.

Monetary policy

Kishida is primed to continue with Abenomics until Japan exits deflation, sticking with monetary easing and the 2% inflation target. That said, he has encouraged the Bank of Japan to engage in a proper dialogue with markets. His stance on the leadership of Japan’s central bank once Governor Haruhiko Kuroda’s term ends in April 2023 remains uncertain. Early signs point to a dovish successor.

Fiscal measures and Covid

Kishida’s approach to tackling Covid-19 appears similar to his predecessor, in terms of re-opening on September 30, strengthening medical capacity and using electronic vaccine certificates.

With almost 60% of the population now fully vaccinated and the Delta variant under control, it sets the stage for a normalisation in activities over the next 6-9 months. But Kishida plans to introduce a new legal framework so that tighter restrictions can be placed on economic activities, and giving local municipalities more power to tackle future outbreaks.

In the near term we expect Kishida to announce a package of fiscal measures in excess of ¥30 trillion (6% of GDP), to be financed through new JGB issuance. Still, the scale of the overall budget is likely to be modest.

Fiscal plans are yet to be detailed, although the LDP leadership race featured proposals to support Covid-19 sufferers, to maintain consumption tax at 10% for the next decade and to revise tax on capital gains dividends.

In campaigning Kishida turned aside from a neoliberal approach to deregulation in favour of redistribution and equitable policies, including financial support for child care and for people who need to stay home during Covid-19.

Over the medium term, he will likely continue with Suga’s strategies for increased digitalisation and environmental protection.

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