Japan: Yoshihide Suga elected as new prime minister of Japan after Shinzo Abe resigns due to ill health
On 16 September, Yoshihide Suga replaced Shinzo Abe as prime minister of Japan following his victory in the ruling Liberal Democratic Party’s leadership election on 14 September. Abe, Japan’s longest-serving leader, announced his desire to resign on 28 August because of a relapse of ill health that had caused him to resign from his first stint in office in 2006. Prime Minister Suga—a veteran politician and Abe’s right-hand man—inherits a country in the midst of a deep pandemic-induced downturn: GDP fell at the fastest rate on record in Q2 2020, the fiscal deficit is expected to spike on the back of sizable stimulus measures, and a colossal public debt burden weighs heavily on the economy.
Moreover, Prime Minister Suga takes the helm of a country shaped by the economic policies of his predecessor: so-called “Abenomics”—defined by three policy arrows—ultra-accommodative monetary policy, fiscal spending and structural reform. Initial impressions indicate that Suga will seek stability in the short term, and accordingly he named a cabinet that is not substantially different from Abe’s previous cohort. Furthermore, a general election must be held by October 2021, and, as such, any large-scale reforms are likely to be only considered following the outcome of that vote.
Regarding the prospect of large-scale policy change, economists at Nomura envisage a short-term period of continuation:
“Prime Minister Suga might not really make his mark on policy until 2021 at the earliest. Initially, we think the government’s economic policy priorities are likely to be influenced by the prospect of the forthcoming general election. This will of course depend on when the election takes place, but we think the government is likely to implement measures aimed at stimulating the economy before the election, which will mean passing a third supplementary budget for FY20.”
However, the prospective economic policy of the Suga administration does appear to be less focused on monetary and fiscal spending and more concentrated on structural reform—the third arrow of Abenomics. Japan has historically suffered from weak aggregate demand, which is set to be compounded by a sharp pandemic-induced contraction in private consumption this year. Moreover, an aging population will place additional weight on the labor force going forward, heightening the need for productivity-enhancing reforms across the economy.
On that front, Hiromichi Shirakawa and Takashi Shiono, economists at Credit Suisse, comment:
“There appear to be three focused areas for “Suganomics” […], which include promotion of digitalization, regional banking reform and corporate restructuring. Importantly, they tend to require industry-level action plans or strategies. This distinguishes Suganomics from Abenomics, as the latter’s backbone was aggressive monetary expansion.”
Regarding the longer-term outlook, Ma Tieying, an economist at DBS Bank, sees the potential for heightened uncertainty:
“Leading the government since December 2012, Abe has become the longest serving prime minister in Japan’s history. Before him, the country had a new leader virtually every year. […] While it is too early to predict, the risk for Japan to slip back into political paralysis or instability after Abe cannot be ruled out. If this were the case, the authorities would face challenges to push for further reforms to reinvigorate the economy, such as restructuring industries, reshuffling supply chains, and tackling the inequality issues after the pandemic.”