Abenomics: “Third arrow” as a necessary condition for trickle-down effects

Put simply, one might say Abenomics has made exporters richer, but not yet busier. When companies become busier is when they will increase their capex, hiring and procurement of parts/raw materials, creating more room for trick-down effects. Facilitating this transition is the challenge for post-election Abenomics. In particular, the third arrow (growth strategy to spur private investment) will have a bigger role to play.

Japan’s ruling parties (LDP and NKP) sailed to victory in the 14 December lower house election, as widely expected, winning a combined 325 seats. This gives the coalition the two-thirds majority (317) needed to override legislation vetoed by the upper house. However, voter turnout was only 52.67% (estimate), sharply below the historical low. With many Japanese voters sensing the futility of their votes in the single-seat constituencies, this decline is also becoming a structural issue.

Together with the disparity in the value of a single vote, which remains in violation of the Constitution, this implies a need for serious discussion of whether the current election system appropriately reflects the will of the Japanese people.

·       With the latest victory, it appears almost certain that the PM Abe will be re-elected head of the LDP when the party presidential election is held in September 2015. If so, Mr Abe could remain PM for as long as 2467 days (when combined with his time as PM to date) until September 2018, the fifth longest in Japanese parliamentary history. This strengthens the administration’s character as a “going concern” and suggests the political stage is set for policy aimed at long-term results rather than short-term ones.

·       Abenomics has sought to promote a trickle down from wealth and J-curve effects, but this has yet to occur. In fact, real GDP has performed worse during the first eight quarters of the latest Abe administration than during the eight quarters of the previous DPJ-led administrations. The post-election challenge for the Abe administration will be to promote trickle-down effects. In particular, we see major role for the third “arrow” of Abenomics, which aims to promote private-sector investment. For now, we believe the key focal points will be corporate tax cuts and boosting the mobility of the labor force (room for revisions to labor contract law).

Ruling parties win lower house election by landslide, as expected
Japan’s 47th general election for the lower house was held on 14 December. As expected based on pre-election polls, the ruling parties (LDP, NKP) won by a landslide (Figure 1). The LDP took 290 seats, down just five from its pre-election 295. Its junior coalition partner, the NKP, took 35, an increase of four. As a result, the ruling parties secured a combined total of 325, nearly matching the pre-election strength of 326. With the NKP increasing its strength in relative terms, this may boost the possibility of reduced rates in certain areas when the VAT rate is eventually raised in April 2017, in line with the party’s wishes.

That said, it is worth mentioning two points in relation to the election itself. First, voter turnout came to only 52.67% (estimate). Although low turnout was expected, the rate was even lower than the 59.32% seen in December 2012, itself a post-WWII low. With half the voting public failing to exercise its rights, the latest election underscores the lack of a clear battleground on the policy front.

Second, the “single-seat constituency trap” should be highlighted. While the LDP won 290 of the 475 seats (61%), the voting rate in single-seat constituencies was just over 40%. The tendency for opposition votes not to be reflected proportionately in single-seat constituencies was evident again this time around. This issue has been highlighted in the past and was reflected in the inaction of the voting public in the latest election.

Together with the issue of seat allocation to address disparities in the value of each vote, this issue underscores the need for full-fledged discussions on whether the current election system accurately reflects the will of the Japanese people.

With the latest victory, it appears almost certain that PM Abe will be re-elected head of the LDP when the party presidential election is held in September 2015. If so, Mr Abe could remain PM until September 2018. Together with his time as PM last time (from 26 September 2006 to 26 September 2007), that means potentially 2467 days in office, the fifth longest in Japanese history.