Shinzo Abe, one of Japan’s longest-serving prime ministers, is once again in hot water. The festering scandal over a controversial sale of public land to a school linked to him is gaining pace, raising the prospect of Abe’s early retirement and the demise of his economic blueprint – Abenomics.
Fallout from this saga reached its peak last July, when Abe’s public approval rating dropped to 35 percent – a low since he took office. A series of victories, including a landslide election win, boosted his approval rating to 46 percent in February. But the scandal took a nefarious turn on March 2, when Japanese media reported that the finance ministry might have altered documents related to the land sales to protect the prime minister.
This kicked off a series of events that culminated in the reported resignation of the head of Japan’s national tax agency on March 9. On the same day, an official at the regional finance ministry bureau in charge of the sale was found dead. And on March 12, the ministry of finance officially admitted to altering the documents.
Needless to say, the public and Abe’s party are following the twists and turns of the investigation into the altered documents and land sale. Opposition parties are calling for the resignation of Ministry of Finance Chief Taro Aso, and some opinion polls show that 70 percent of the public feel the same way. This outcome could be facilitated by a further decrease in Abe’s approval rating.
We see a 20–30 percent chance that Aso will resign, which could prompt a market pullback in the short term due to worries over the waning power of Abenomics within the LDP. The bigger issue is Abe’s approval rating, which has fallen 4–6ppt since March 2. Japanese prime ministers have historically resigned after their approval ratings fell below 30 percent, hence the concern about Abe’s long-term tenure.
If Aso is forced to retire, public opinion on him will likely sour and could lead his public approval rating back toward 30 percent. And if it falls too low, below the 30 percent threshold for instance, the LDP could opt not to elect him as party leader at the representation election in September.
While he has no rivals at the moment, this ongoing scandal, his controversial pursuit of constitutional change and contenders using his slide in popularity to mount a challenge could make his re-election problematic. It is worth noting that Abe’s closest competitor for LDP chief, Shigeru Ishiba, enjoyed an 8ppt bump in approval rating in January.
The risk of Abe losing the party election may be low – we assign a 10 percent chance to it – but its impact would be significant as it would mean the likely end of Abenomics. Without Abe at the helm, his successor would probably abandon the package and replace it with a different economic paradigm.
The three arrows of Abenomics have been credited with helping to end Japan’s disinflationary cycle and revitalize economic growth. So its end would rattle investors, especially foreign ones, who have relied on the plan’s pro-growth, pro-business strategy as a source of stability and promise.
We are currently neutral on Japanese equities in our global strategic asset allocation, and are not changing this guidance. But investors should monitor coming events and Abe’s approval ratings, which could determine his longevity in office. Nonetheless, we expect the prime minister to remain in power in the coming years and to survive yet another career-threatening scandal.
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