Sayonara Abenomics? Not So Fast

Japan’s political stability in general, and Prime Minister Shinzo Abe’s strong grip on power in particular, have been the centerpiece of the “bullish Japan thesis” for many investors. “Team Abe” has had a fundamental pro-growth and pro-business bias and, in the final analysis, has had a good track record of getting things done. Unfortunately, in recent days, the “Moritomo affair” has evolved in a way that could force an end to Abe’s undisputed premiership. While we do think Abe is more likely to survive than not, the threat is serious enough to force us to think about possible post-Abe Japan scenarios.

First, the good news. It is a fact that there are no major economic policy issues on the agenda. Fiscal policy is on track for a modest boost to domestic demand—a supplementary budget got ratified in parliament earlier this year, and the FY2018 main budget was approved in the lower house on February 28 (which means it will automatically become law at the start of the new fiscal year on April 1, even if upper house deliberations get delayed). There is no risk of government shutdown. And monetary policy is also on a stable track, with Bank of Japan Governor Haruhiko Kuroda and two new deputies already past their parliamentary approvals.

For Team Abe, the big economic agenda item for 2018 was labor market reform, but that was killed off by internal Liberal Democratic Party opposition. Apart from this, the agenda is empty. Sad but true—from an economic policy perspective, the fact that “Abenomics” has no concrete agenda at the moment actually minimizes the possible damage to the economy should the government fall or be disrupted. In short, Japan’s economy is on autopilot.

The bad news is that, yes, Team Abe will be a nearly impossible act to follow (from an investor’s perspective). Should Abe be forced to resign—and, at this stage, I don’t think he will have to—the LDP is bound to elect a de facto caretaker government, elected from among the LDP members but not legitimized by the public (there is no need to call a general election).