Global Interest in Japan’s Election, Expected to Strengthen Premier

The world is awaiting economic reforms while China frets about a more assertive Japan in East China Sea disputes.

Osaka Castle, Japan, November 15, 2011
Osaka Castle, Japan, November 15, 2011 (D. Julien)

As Japanese go to the polls Sunday to vote in elections for the upper house of parliament, all eyes will really be on the margin of victory for Prime Minister Shinzō Abe’s ruling coalition. Judging from the latest polls, and from the results of municipal elections in Tokyo last month where Abe’s Liberal Democrats won handily, the premier can expect to gain control of the upper chamber and claim a mandate for his policies that could fundamentally change the world’s third largest economy and its role in the region.

After the elections, the real drama will start. Abe will be expected to move forward and provide greater details about his plans to restructure the Japanese economy, the so-called third arrow of “Abenomics.”

In addition, Abe could change Japan’s national-security strategy which would transform the role of the military for the first time since the end of World War II.

Abe’s party and its coalition partner, the conservative New Komeito, are expected to win up to seventy of the contested seats. Half of the chamber’s 242 seats stand for election every three years. After winning a lower chamber majority last year, a victory this weekend would strengthen Abe’s mandate to pursue economic reforms that might otherwise have been stifled by a divided legislature.

“Abenomics” consists of three arrows: fiscal stimulus, monetary stimulus and restructuring the economy. Late last year, Abe unveiled a fiscal stimulus plan worth ¥10.3 trillion ($116 billion). The Bank of Japan later announced greater monetary easing by lifting its inflation target from 1 to 2 percent, allowing it to pump more money into the economy.

The third arrow is the most important to improve Japan’s economic prospects for the long term. It has largely been kept under wraps until after the upper house election. With Abe’s expected victory, there will be expectations for greater clarity.

The corporate income tax, at 40 percent, is expected to be lowered, perhaps to 20 or 25 percent. Labor reforms are needed too. Will companies be able to trim their workforces if deemed necessary in order to compete globally?

Another area is agriculture, long a politically sensitive sector of the economy, but increasingly uncompetitive. It will be interesting to see if Abe proposes cutting agricultural subsidies. He will also be under pressure to allow more foreign competition in such industries as finance and insurance.

With Japan participating in talks to join the Trans Pacific Partnership, a proposed free-trade area encompassing Pacific Rim nations, it will need to open its economy anyway.

Japan’s immediate neighbors will be watching the elections and its aftermath closely too, most notably China. Abe has said that he wants to revise Japan’s pacifist constitution to make his a “normal country.” With Abe considered a nationalist, a move to rearm the military and allow it to take a more robust stand in the region will surely raise tensions more than they already have with China over the disputed Senkaku Islands in the East China Sea.

Since his election in December, Abe raised defense spending for the first time in eleven years and promised to vigorously defend Japanese interests in the region. Japan’s Ministry of Defense, a few weeks ago, took the unprecedented step of explicitly criticizing China by name over its actions in the Senkaku dispute.

It has also been reported that the Japanese government plans on naming a council after Sunday’s elections to study nationalizing four hundred or so remote islands in its territorial waters. This would bolster Japan’s claim to possible natural resources there and assert its regional sovereignty.

In light of China’s increasingly aggressive maritime activities in the area and its challenge to Japanese sovereignty over the Senkaku Islands (it calls them Diaoyu), a more active Japanese navy could spark a clash at sea.

Last September, Sino-Japanese relations entered a more turbulent period after the central government in Tokyo nationalized three islands in the Senkaku chain in order to keep them from being purchased by the nationalist governor of the city, Shintaro Ishihara. If Japan were to move forward on hundreds more islands, it would undoubtedly be viewed as a provocation in China which would most likely raise the ante in response.

Given the stakes, Sunday’s election promises to be one of the most consequential in Japan’s history in a long time. It has deep interest in Japan but for regional and global players as well.