Japan: Political situation has been destabilized - Nomura

Analysts at Nomura suggest that the political situation in Japan has been destabilized, with the Cabinet's approval ratings falling sharply in the wake of the Moritomo Gakuen scandal in which the Ministry of Finance altered records relating to a discounted sale of state-owned land to school operator Moritomo Gakuen.

Key Quotes

“One political consequence of this that we can see at the moment is that Prime Minister Shinzo Abe no longer looks certain to win a third term as leader of the LDP in the leadership election scheduled for this September.”

“Two people who are regarded as potential candidates to stand against Prime Minister Abe in the September LDP leadership election have called for fiscal policies that lean more towards fiscal austerity than those of the current government, and also for a more hawkish stance on monetary policy. Put simply, therefore, it appears that one possible policy implication of the recent destabilization of the political situation in Japan is a move to a more hawkish stance on both fiscal and monetary policy.”

“However, the main point we would like to make in this report is that the direction of change in the government’s policy mix in the wake of the recent political instability in Japan will not necessarily be a move away from the bold monetary easing and flexible stance on fiscal expansion seen under Abenomics towards a more hawkish stance on both fiscal and monetary policy.”

“We see a possibility that Japan’s current administration might move to a policy mix that combines fiscal expansion and even more aggressive monetary easing, which is the exact opposite of a move towards a more hawkish stance on both fiscal and monetary policy, partly in order to prevent the strong yen from further postponing an end to deflation, and also partly to boost the Cabinet's support ratings.”