Japan – Abe’s Pet Project Hits a Snag

Losses sustained by the main governing LDP at elections for roughly one-half of the seats in the 245-member House of Councilors, the upper chamber of the Parliament, have significantly complicated Prime Minister Shinzo Abe’s hopes of achieving his goal of revising Japan’s pacifist constitution before the current term, which will be his last. The LDP’s coalition partner made a net gain of three seats, ensuring a comfortable majority of 141 seats, and Nippon Ishin no Kai, which supports Abe’s reforms, also picked up three seats, boosting its total to 16. However, that still leave the pro-revision parties short of the two-thirds majority required to approve a constitutional amendment.

The outcome provides further evidence of a lack of consensus behind the proposal to eliminate the prohibition on Japan’s use of military force for purposes other than defense of the homeland. Many voters would prefer that Abe and his government focus on economic issues, including obtaining better trade terms, and preparing to address the negative economic fallout from an increase in the consumption tax (from 8% to 10%) that is scheduled to take effect on October 1. However, Abe remains committed to the project, and a Cabinet reshuffle carried out in early September retained or placed like-minded figures, most of them affiliated with the ultra-nationalist Nippon Kaigi organization, in all of the most influential positions.

Although the LDP’s recent election performance was disappointing, the party’s dominant position in the Parliament is not at risk, despite attempts by the two new parties formed from the wreckage of the former Democratic Party—the CDP and the DPP—to create a basis for electoral cooperation. As such, the government can count on possessing the legislative heft required to make progress on other policy initiatives.

The Abe administration had been hoping to conclude a free-trade agreement with the US to complement the trade deal with the EU that came into effect earlier this year. However, the “mini deal” signed in late September was largely limited to trade in agricultural products, while discussion of automobile exports has been postponed to an unspecified future date. At the same time, heightened diplomatic tensions with South Korea over the latter’s demands for reparations for historical injustices have clouded the outlook for concluding a trilateral trade agreement with China.

Real GDP growth held steady at 1% (year-on-year) in the second quarter, as robust domestic demand helped to offset the negative impact of weaker external demand and global trade tensions on the performance of the export sector. The escalation of US-China trade tensions has cooled business investment, and an increase in the VAT from October 1 figures to put a dent in household spending. Although the stimulus from spending on construction related to the 2020 Olympics may help to put a floor under a fourth-quarter slowdown, annual real GDP growth is unlikely to top 1% in 2019, and downside risks are significant.

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