Agencies
As the Japanese election outcome sends shock waves, political uncertainty may delay economic reforms, increase government spending and potentially postpone the Bank of Japan’s (BOJ) exit from its outlier monetary policy, economists warned Wednesday.
Post-war Japan has long been a byword for political stability, with the conservative, market-friendly Liberal Democratic Party (LDP) in power for all but four of the last 69 years.
However, the LDP-Komeito coalition lost its majority on Sunday, likely forcing Prime Minister Shigeru Ishiba into a minority government that would need support from other parties to pass legislation.
Businesses and economists worry that as concessions to other parties, Ishiba, 67, will offer tax cuts and higher spending and go slow on reforms needed to improve Japan’s competitiveness.
Since 2021, “the country has had three prime ministers, and Ishiba probably won’t last very long in office, either,” predicted Marcel Thieliant at Capital Economics.“That means that sweeping reform projects are unlikely,” he said – changes that were already “few and far between” in the past decade.
Syetarn Hansakul from the Economist Intelligence Unit also anticipated a “dilution of (the LDP’s) reform agenda,” which included plans to increase spending on defense and social welfare.In addition to investor sentiment, this will “dent confidence among households and businesses. Domestic demand recovery could suffer as a result,” she said.Ishiba has promised more support for households to accelerate wage increases and help revitalize rural areas, but some opposition parties want more.
The Democratic Party for the People (DPP), a potential kingmaker, wants energy subsidies for consumers and lower taxes for part-time workers.
However, while aimed at reducing worker shortages in aging Japan, this would also reduce the government’s tax revenues.Japan already has one of the world’s highest debt-to-output ratios at around 250% of gross domestic product (GDP).
Media reports suggest that Ishiba will issue a new economic policy package next month and plans to include some proposals from the DPP.
“(Although) Ishiba appears to appreciate fiscal discipline, he will likely continue to compromise and refrain from discussing additional revenue measures even though they are important in the long run,” said Shigeto Nagai at Oxford Economics.
The Japan Business Federation, or Keidanren, urged parties to overcome differences and concentrate on growing the economy.
“Japan cannot afford the luxury of delay in addressing these issues,” Takeshi Niinami, the head of the Japan Association of Corporate Executives, said.
All parties should “face the reality of the situation, engage in thorough discussions, and move forward with the necessary policies,” he said.
