With solid political base, Abenomics can continue

Global and Japanese stock markets rallied after Prime Minister Shinzo Abe’s Liberal Democratic Party (LDP) claimed victory in latest elections with a majority of 121 seats in the 242-member upper chamber, boosting his ability to modify the country’s pacifist constitution. Although changing Japan’s military role was a main focus of these elections, contrasted results of Abe’s economic policy were also at stake.

Financial analysts welcomed the news as confirmation of the continuation of the very accommodative Abenomics and of the likely launching of a new round of large-scale economic stimulus from the Bank of Japan (BOJ).  In January 2016, the BOJ reminded that by conducting markets operations so that Japan’s monetary base increases at an annual pace of about YEN 80 trillion, it “aimed at achieving price stability, thereby contributing to the sound development of the national economy.”

While keeping 2% year-on-year as required inflation for “price stability target,” the BOJ introduced “Quantitative and Qualitative Monetary Easing (QQE) with a negative interest rate” of minus 0.1% to current accounts held by financial institutions at the BOJ. As the latest Regional Economic Report showed that globally the pace of Japan’s economic improvement has remained unchanged since April 2016, Abe has now full political legitimacy to continue his Japan Revitalization Strategy which, his cabinet wrote, “has put Japan’s economy on the path to exit from deflation and make a steady recovery.”

On the geopolitical side, many experts acknowledged that given the threats in the Asia-Pacific region – especially North Korea – Japan must indeed update its military policy, but they also feared that a too radical change in Japan’s stance may prompt further tensions in the region, particularly with China whose recent moves in disputed areas of the South China Sea preoccupied the US and its allies, including Japan.