Japan turns to 'Suganomics' — but analysts say the policy will likely continue Abe's legacy

Japan’s new prime minister Yoshihide Suga will likely pull out all stops to revive the economy badly hit by the coronavirus pandemic but still continue the policy of outgoing leader Shinzo Abe, analysts said.

Suga was formally voted prime minister by parliament’s lower house on Wednesday, and took the helm as Japan’s first new leader in eight years.

Abe, who resigned in August due to ill health, is known for his economic policies that are collectively known as “Abenomics.” The three-pronged approach is aimed at combating deflation and reviving economic growth with loose monetary policy and fiscal spending, alongside structural reforms to cope with a rapidly aging population.

Suga’s new cabinet roll-out demonstrated his desire to maintain stability and continuity as he kept many ministers in place while choosing new ones from different factions in his Liberal Democratic Party, noted Scott Seaman, Asia director at the Eurasia Group in a report.

But “Suga’s focus on pulling out all the stops to support a recovery makes it likely that he will provide fresh stimulus by continuing to use contingency reserve funds, passing another supplementary budget late this year or early next year, and compiling a robust FY2021 regular budget,” said Seaman in a note on Wednesday.

There are three key concerns from the market’s point of view, according to Fidelity’s Katsumi Ishibashi.

“The government’s economic policy, promotion of structural reform and deregulation, and the stability of the administration to support these key initiatives are the top three concerns,” said Ishibashi, senior cross-asset analyst and portfolio manager at Fidelity International in a note on Thursday.

In his first press conference as prime minister on Wednesday, Suga said he will do his best to protect jobs while countering the coronavirus at the same time, Reuters reported.

Eurasia’s Seaman said Suga will likely to do so by:

• Dipping into 10 trillion Japanese yen ($95.44 billion) of contingency funds from a second supplementary budget for the 2020 fiscal year;
• Passing a third supplementary budget; and
• Compiling a big regular budget for the 2021 fiscal year to prop up the economy.

“Next year’s budget will likely be large, and we cannot rule out the possibility that Suga’s government will include novel measures in it such as a one-year tax holiday on personal income taxes for lower-income households,” said Seaman.

However, Suga is unlikely to stray far from the path of Abenomics, said analysts.

For one, he will not likely make any immediate changes to the Bank of Japan’s policies even if politicians in Japan have a larger influence on monetary policy than in other advanced economies, said Tom Learmouth, Japan economist at Capital Economics. But he will have an opportunity to reshape the central bank’s policy board when two members will be replaced next year, Learmouth said.

“One possible shift that may result is a greater willingness to cut the policy rate: Mr Suga appears less concerned than the current Board members about threats to financial stability from further rate cuts,” said Learmouth in a report “Unpacking Suganomics” on Tuesday.

Suga is also expected to quicken reforms for the regional banking sector due to concerns over deteriorating profitability.

“The coronavirus crisis is exacerbating these concerns by driving up non-performing loans. As a result, we expect the drive to promote mergers amongst regional banks to gather pace under PM Suga. That should help diminish the threat from loose monetary policy to financial stability over the longer term,” he said.

But when it comes to fiscal policy, the differences between Suga and Abe are “tiny,” as Suga has pledged to keep policy loose until the economy has recovered from the pandemic, Learmouth noted.

But Suga — who seems more supportive of immigration — may lift annual net migration that would help offset some of the drag from a shrinking working age population. He may also be able to push through more aggressive hikes to the minimum wage once the economy has recovered from the pandemic — thus lifting productivity, wrote Learmouth.

No matter the plans and changes, the new Japanese prime minister has a short term ahead of him, as he faces another Liberal Democratic Party leadership contest in September 2021 — when Abe’s original term was due to end.