Sunday, December 16, 2012

Pre-election Foresight

Let me put it this way: For my single-member and regional proportional choices, I am going to split my vote today. I never seriously considered abstaining, but I am definitely not stoked up for the event. In the meantime, here’s a memo in the form of answers to questions that have been put to me for use tomorrow. It’s a work-related memo, but I’m not getting paid for it, so I don’t think I’m in danger of committing an ethical breach if I post them on my blog today. Let’s hope that I won’t get an egg facial come tomorrow, January, April, or 2014.*
* You’ll see what I’m talking about when you read through.

1.    What do you expect from the elections?

I expect the outcome to be more or less what the newspaper surveys tell us, the LDP-Komeito coalition should score a landslide victory and return Shinzo Abe to the prime minister’s office. The coalition will have a much better chance of breaking the cycle of annual prime minister turnovers if it wins a supermajority so that the upper house cannot veto key legislation. A twisted Diet, with Prime Minister Abe? Who’d have thought that we’d see this again, three years ago?

2.    What policy changes afterward?

The most significant change in the immediate future will come on macroeconomic policy. On fiscal policy, the Liberal Democrats are pushing a 10-year, 200 trillion infrastructure buildup plan to make Japan more disaster-resistant. On monetary policy, the Liberal Democrats will seek an explicit 2% inflation target, and a policy accord between the administration and the Bank of Japan to implement it. It will seek legislation, and very likely, a more cooperative BOJ governor when Masaki Shirakawa’s term is up, in April. I expect Abe to grease the political wheels at home to push Japan into the Trans-Pacific Partnership negotiations when he visits Washington next month. Don’t expect Abe to change course on nuclear power. I am certain that he will respect decisions made by the new Nuclear Regulation Authority. The Liberal Democrats may be the pro-nuclear party, but they know which way the political winds are blowing on this one. Do not expect any drama near-term on the constitutional reform or external relations despite what you’ve might have been hearing from in recent months, but keep an eye out for Chinese escalation on the Senkaku Islands, since Abe is the last person that can afford to look conciliatory is and when that happens. This can have a significant impact on the economy.

3.    How important will these be for the strength of the economy and the yen, what are the challenges and risks?

Personally, I don’t think that first putting a number on infrastructure spending, then deciding where to spend afterwards, is a wise course of action, but that’s the usual politics at work, and there is a genuine need to refurbish and upgrade infrastructure that we built over the years. More immediately, it should help keep the economy afloat as the LDP-Komeito coalition and the Democratic Party, now in opposition, spend the next year working on the social security and tax reform and launch the consumption tax hike in fiscal years 2014 and 2015. I don’t see how much better an explicit 2% inflation target is than the implicit 1% one that we have now is, but I’m not an economist. And this expansive macroeconomic talk from Abe and the LDP has already been pushing the yen down, and that must be good for the Japanese economy in the short run. We’ll be importing a little inflation with this, but that again is a macroeconomic plus at this juncture.

The challenge on the infrastructure buildup is to plan and spend wisely, but that’s a long-term issue. Pushing on the monetary string is more problematic. I’m not an economist, but there’s a fine line between a) reinforcing policy coordination, which in principle is a good thing, and b) undermining central bank authority, which is a no-no, at least in industrialized democracies. Abe could pass the legislation if the LDP-Komeito wins a lower house supermajority, but he needs the consent of both houses to appoint the BOJ governor, and the opposition parties will resist more fiercely if he forces the legislative question. That’s a few months down the line, though. More immediately, if he yields to dissenters in his own party and fails to put Japan into the TPP negotiations when he visits Washington, I don’t think he’ll have a second chance, partly because of the negotiation schedule, but more significantly because this is the best opportunity to cash in on his political capital and show that he can lead. Further down the timeline, he needs to level with the Japanese public about the benefits side of the social security and tax reform issue. Missteps on these issues will deplete Abe political capital quickly, and prime ministers have been on a short leash in recent years. The reluctance, or inability, of the LDP—and the DPJ as well—to speak clearly on the last two during the election campaign is a little worrying.

Speaking of political capital, the one danger unique to Abe is that he’ll follow his values-conservative heart and concentrate on non-economic issues such as rewriting the constitution, renaming the Self-Defense Forces, and fighting the teachers union. And there will always be China, and whether or not the two sides largely keep the Senkaku issue from spilling over again to the economic relationship, as the wild card.

Those are the main known risks. Most of them will be easier to negotiate around if the coalition wins a supermajority, but overconfidence can also be dangerous.

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