Australia: Prime Minister Abe’s re-election - where to now for Japan

The re-election of Prime Minister Abe and his LDP party is arguably the most important political development in Japan for more than a decade – and offers real hope that Japan could finally emerge from its economic malaise of the past two decades.

Prime Minister Abe's LDP won 291 of the 475 seats in the Diet's Lower House - and with their coalition partner the Komeito winning 35 - the Abe government is assured of the two thirds majority necessary to pass legislation without recourse to the Upper House.

As a result Abe has the possibility of a further four years in power which would make him one of Japan's longest serving Prime Ministers.

Despite some claims to the contrary, Abe now has a mandate to pursue his package of economic policies known as Abenomics. Indeed the LDP's election slogan –"there is no alternative for economic reform"- means Abe's political future is inextricably linked to the success of Abenomics and returning Japan to modest, sustained growth and inflation.

Underpinning Abeconomics is Abe's so called "three arrows': extraordinary monetary stimulus to defeat deflation which has plagued Japan for 15 years; fiscal stimulus to facilitate change and stimulate growth; and fundamental structural reforms.

To date the focus of Abenomics has been on the first two arrows which are the easiest politically to implement. Massive monetary stimulus under the direction of Bank of Japan Governor Kuroda has had some success in stimulating inflation. Although the target of two percent has not yet been reached, inflation has been helped by a depreciating Yen, which has boosted Japan's export competitiveness, and a soaring Japanese stock market. The labour market has also tightened with unemployment falling to around 3.5 per cent - a figure last seen in 1997.

While more symbolic than substantive at this stage there have been some salary increases in 2014. For many Japanese, it will be the first wage raise they have ever received. A surge in construction in the lead up to the 2020 Tokyo Olympics will further buoy the labour market and help stimulate consumption and inflation.

However, despite the fiscal stimulus, a dramatic increase in Japan's consumption tax (GST) in April from 5 to 8 per cent has resulted in two quarters of negative economic growth. Consequently Prime Minister Abe has decided to defer the further increase in the tax to 10 per cent that had been scheduled for October 2015.

To date only modest progress has been made on the third 'arrow' – structural reform. For Abenomics to be successful Prime Minister Abe has to move aggressively on reforms that will inevitably take time to show results. Everything from improving the low participation rates of women and older workers to agricultural reform and deregulation in the health and pharmaceutical sectors are in line for change.

The changing mandate of Japan's huge ($1.2 trillion) Government Pension Investment Fund (GPIF) to allow for investing a higher proportion of funds in equities and other asset classes such as infrastructure, also has significant implications for the economy.

But Prime Minister Abe is going to have to use his new political strength to move forward on the reform agenda.

Japan's return to sustained growth is important, not only for its domestic economy but also on a regional and global scale.

Japan is Australia's second largest export market and the new Japan Australia Economic Partnership Agreement (JAEPA), in force from 15 January 2015, opens up further opportunities - not just in the traditional areas of resources and agriculture but also in high value manufactures and services.

It's sometimes forgotten that despite two lost decades Japan remains a very wealthy country where consumers have high levels of savings and low household debt. Japan has been, and continues to be, a major investor in Australia. New inflows of FDI from Japan totaled $10 billion in 2013, double the $5 billion from China.

And we can be confident that substantial FDI inflows will continue. Japan's major banks have strong balance sheets and its world class corporations have substantial accumulated cash on their balance sheets. A declining domestic population also means Japanese companies need to look for investment opportunities globally.

Australia is well placed to gain a share of the outward investment flows, and the current very positive political relations can only further encourage this trend.

If Abenomics was to falter there would be negative economic and political consequences, although there could also be an even greater incentive for Japanese banks and corporations to seek better growth opportunities and higher returns outside of Japan.

So Japan deserves close attention over the coming year – an early indicator of Prime Minister Abe's strategy will be an expected Cabinet reshuffle in late December.

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