When Prime Minister Shinzo Abe and the LDP were returned to power in late 2012, the victory was attributed less to enthusiasm for the winners than to frustration with the incumbent DPJ. However, the LDP’s comeback was completed at upper-house elections held in July 2013, at which voters registered a clear vote of confidence in the prime minister and his government’s program of monetary easing, fiscal stimulus and structural reforms that has been dubbed “Abenomics.”

With his position solidified, Abe stands a good chance of bucking the political trend of the last two decades and completing his four-year term, which will expire in late 2016. That said, a lack of aggressiveness in proposals related to the most politically risky component of the prime minister’s economic program—structural reforms—points to the danger that Abe might fail to use his current political strength to pursue controversial changes to the tax code, labor regulations, and immigration rules, to the detriment of both the health of the economy and his own popularity later in the current term.

The concern at the moment is that the government will shrink from raising taxes on consumers while simultaneously cutting taxes on businesses.

Polls reveal significant public antipathy toward an impending increase in the sales tax (from 5 to 8 percent). A second increase (to 10 percent) is tentatively planned for 2015, when the government has also proposed reversing a hike in the corporate tax rate implemented in the aftermath of the 2011 earthquake, tsunami, and nuclear disaster.

The concern at the moment is that the government will shrink from raising taxes on consumers while simultaneously cutting taxes on businesses; a delay in either the second hike in the sales tax or the decrease in the corporate tax rate will upset the careful balance between economic stimulus and fiscal responsibility that is one of the hallmarks of Abe’s blueprint.

Similarly, opposition of Japanese farmers to the tariff reductions that would accompany implementation of the TPP poses an obstacle to Japan’s participation in the trans-oceanic free-trade initiative, which is another element of the so-called “third arrow” of Abenomics. Ultimately, if the third arrow misses its mark, the whole program will likely fall short.


The PRS Group
About The Author The PRS Group
The PRS Group is a leading global provider of political and country risk analysis and forecasts, covering 140 countries. Based on proprietary, quantitative risk models, the firm's clientele includes financial institutions, multilateral agencies, and trans-national firms.


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