Abe wins election, but wage trial will be tougher

December 15, 2014

By Andy Mukherjee

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

A solid election majority has given Japan’s prime minister a fresh mandate to lift wages and end deflation. But Shinzo Abe and his ruling alliance can’t keep their promise by merely printing more yen. Productivity-led pay hikes will require reforms, and those may not materialize very quickly.

The Liberal Democratic Party and its partner Komeito won 326 seats in a 475-member lower house in the Dec. 14 snap poll, surpassing the 317-seat “super majority” needed for the alliance to retain its veto over legislation in the upper house of parliament. Yet a low voter turnout suggests the prime minister can’t take extended support for his “Abenomics” brand of reform for granted.

Increasing real wages is thus essential. There are two ways to arrest their 16-month slide: for prices to start falling, or for investment in Japan to increase. The former would be a big setback for Abe’s anti-deflation campaign. So Abe will need to focus on the latter. He has to speed up reforms by lowering agricultural tariffs, easing immigration policies and by nudging companies to boost shareholder returns. Only then will businesses invest in Japan to take advantage of a weak yen.

First, Abe has a more immediate goal: to pull the economy out of recession. That may require some short-term fixes, like issuing spending vouchers to households who feel worse off since Abe raised the sales tax in April. A planned second increase has been delayed by 18 months. That kind of largesse will weigh on the forthcoming 2015 budget. With public borrowing at 245 percent of GDP, Abe may have hard work convincing the Bank of Japan that he can reduce government debt and deficits in the medium term.

In sum, the coming trial by wages could be even tougher than Abe’s trial by electorate. In January this year, the prime minister optimistically talked of a coming “wage surprise” in Japan. He now has a chance to keep that pledge. If he blows it, the next public vote – Japan’s upper house election is in 2016 – could present a very different verdict on Abe and his Abenomics.

 

No comments so far

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/