Date
24 August 2017
Even if Shinzo Abe resigns from his post, his LDP party will most likely remain in power in Japan thanks to the lack of viable opposition parties. Photo: Reuters
Even if Shinzo Abe resigns from his post, his LDP party will most likely remain in power in Japan thanks to the lack of viable opposition parties. Photo: Reuters

Will Abe lose his job?

Shinzo Abe, the third-longest serving prime minister of post-war Japan, is in a perilous position. A raft of scandals, including corruption allegations involving his wife, has eroded public trust in the country’s leader. Approval for Abe’s administration dipped below 30 percent in some polls on 16 July, plunging 13 percentage points over the past month. Such widespread unpopularity marks a dramatic new low for the prime minister.

Investors are now worried that the brainchild of Abenomics and the once-hailed hero of Japan’s recovery will be forced to resign. There is a historical precedent for this concern: Liberal Democratic Party (LDP) prime ministers with sub-30 percent approval ratings have stepped down in the past (see Fig. 1). And if Abe’s approval ratings fail to strengthen over the coming months, LDP members may start to distance themselves from him for their own political survival, adding further pressure on the PM to resign.

So will Abe quit his post? We are doubtful, and expect the prime minister to turn things around in the months ahead. A couple of factors should contribute to his long-term job security.

First, Abe undertook a cabinet reshuffle on August 3. This new administration will probably implement approval-boosting policies like stepping up investment on human resources and reforming Japan’s education system. Also, the new government might propose replacements for the Bank of Japan’s governor and vice governors earlier than expected. Both factors could improve Abe’s approval ratings to a more sustainable level.

Second, if Abe’s approval ratings fail to rise, he would have two choices: call for a snap general election or resign. We think the PM would opt for the former. Support for opposition parties is currently extremely low, making it very likely that the LDP would secure a large majority (see Fig. 2) if a snap election were called. And as long as the LDP retains a large majority in the Lower House, which is very likely, Abe’s position as prime minister will remain secure, in our view.

Still, Abe resigning due to low approval ratings and/or harsh criticism from LDP members is a tail risk. If such a scenario transpires, we would expect the markets to be very disappointed, causing a selloff of Japanese assets. Given this, investors should pay close attention to Abe’s polling numbers in the months to come.

Even if Abe resigns, the LDP will most likely remain in power thanks to the lack of viable opposition parties. We think the continuity of the LDP’s reflationary policies would provide some relief to the market in the mid to long run. We believe the market would then shift its focus to the monetary and economic policies of the new LDP regime.

Daiju Aoki is Regional Chief Investment Officer and Chief Japan Economist at UBS Wealth Management

– Contact us at english@hkej.com

RC

Liberal Democratic Party (LDP) prime ministers with sub-30% approval ratings have stepped down in the past.


Support for opposition parties is currently extremely low, making it very likely that the LDP would secure a large majority


Executive Director and Regional CIO Japan, UBS

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