Japan post-election policy outlook

On 22 October 2017, the Japanese government was re-elected in the second snap general election since Shinzō Abe became prime minister in December 2012.

Strong performance by ruling coalition

Following the snap election on 22 October, the ruling coalition of Prime Minister Shinzō Abe's Liberal Democratic Party (LDP) and Komei Party (KP) not only retained its majority, but also gained a super-majority of seats in the Diet's Lower House. Holding more than the two-thirds threshold of the 465 seats, the coalition is in a strong position to make progress on the majority of its policy aims. Specifically, these victories mean the LDP should be able to influence, if not lead, all the standing committees in the Diet, which discuss and determine the content of legislative bills.

Before the election, the main opposition Democratic Party (DP) split, with a majority of its candidates running for the newly formed Hope Party. However, despite ambitious claims following influential Tokyo governor Yuriko Koike's formation of the party in October, it failed to challenge the ruling coalition's position either in first-past-the-post constituencies or for proportional-representation seats. The biggest losers in the election were small parties, which in most cases lost all their seats.

In contrast, the liberal wing of the old DP formed the Constitutional Democratic Party (CDP). Importantly, although the CDP fielded far fewer candidates, it ran on a platform of grassroots (re-)democratisation of Japan, effectively leveraged social media, and performed better than expected with 55 seats. Although the CDP is unlikely to be able to approach the ruling coalition's support rating in the one-year outlook, these factors mean it will provide substantial opposition to the LDP's "yes" campaign in a referendum to change Japan's constitution and could lead to the proposal failing.

The poll illustrated a generational gap, with the vast majority of under-30s supporting Abe's administration; over-50s were divided but mainly supported other parties. Notably, 18- and 19-year-olds were allowed to vote for the first time in a general election. Nonetheless, even considering bad weather conditions because of Typhoon Lan, a low voter turn-out - the second-lowest since the Second World War at about 54% - highlights continuing disaffection among the electorate. This is important because it means the ruling coalition's mandate may not be as strong as election outcomes indicate.

Progress on Abe's priority policies likely in coming year

Snap elections and campaigning for key contests such as the Tokyo metropolitan assembly election have delayed policy progress, even more so than might be expected given Japan's relatively slow, consensus-driven legislative process. Abe's decisions to call the snap election in October 2017 and December 2014 are likely to have been motivated by a desire to assert his position within his party and in the Diet. Despite a low voter turn-out, victory for the ruling coalition will have quieted internal LDP opposition to Abe and Diet opposition to those of his policies viewed as "unpopular" in left-wing (especially English-language) media, such as the constitutional referendum.

The LDP's landslide victory means Abe's growth strategies and the Bank of Japan (BoJ)'s aggressive monetary easing will continue. The Japan Business Federation (Keidanren) welcomed the election victory because it strengthened the ruling coalition's mandate to progress "Abenomics" policies to solve pressing economic issues including escaping deflation, economic revitalisation, improving the social security system, and fiscal consolidation.

Abe will probably proceed with the consumption tax increase from 8% to 10% as planned in October 2019; he has said that he will only consider postponing it for a third time if there were a severe economic slowdown akin to the global financial crisis. An amendment to the Consumption Tax Law means that revenue from the tax increase in October 2019 will fund increased social security expenditure, making the rise a necessary condition for the LDP to follow through on its election promises to provide free pre-school education and child-care.

Outlook and implications

The relatively poor results for the new Hope Party indicate that Japan's opposition - even with some new faces and updated policy promises - remains fractured and weak. However, all the CDP's incumbents kept their seats. Its ideological cohesion (relative to the DP in the past) will probably be key to the CDP maintaining this momentum to challenge the conservative ruling LDP and opposition HP in future elections. If the CDP were able successfully to scupper Abe's proposed constitutional amendment in a referendum, Abe would be likely to lose the LDP's presidential election in September 2018, despite the latest general election victory.

Notable policy progress is probable following this election on the consumption tax, social security, and education. However, the Abe administration needs to accelerate structural reforms, or fiscal discipline will become increasingly difficult. The BoJ's prolonged aggressive monetary easing could increase negative effects on financial markets, unless structural reforms help boost wage increases - one of the key factors for sustainable inflation. In addition, extra budget requirements will mean the government's target of eliminating the primary balance deficit will be pushed back from its target of fiscal year (FY) 2020. IHS Markit expects that the target could be extended to the late 2020s or even later, because the LDP's election promises do not include any specific plans to reduce public spending. A proposed JPY2-trillion (USD18 billion) package (0.4% of nominal GDP) will probably have a limited effect, softening the downside from the tax change and boosting funding for public education. However, the government would still have to expand the capacity of day-care centres to encourage women's participation and expand the labour force. Moreover, free education would probably create even more obstacles to the BoJ's 2% inflation target: IHS Markit assesses that free pre-school and day-care facilities would probably reduce the consumer price index (CPI) by about 0.3 percentage point, creating further downside pressure to inflation and hindering progress towards a normalisation of monetary policies.

Alison Evans, Senior Analyst Country Risk - Asia-Pacific at IHS Markit
Posted 2 November 2017