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Markets would miss Japan's reformer-in-chief
March 24, 2017 / 10:45 AM / 7 months ago

Markets would miss Japan's reformer-in-chief

Japanese Prime Minister Shinzo Abe attends a joint news conference with his Italian counterpart Paolo Gentiloni (not pictured) at the end of a meeting at Chigi Palace in Rome, Italy March 21, 2017. REUTERS/Remo Casilli

HONG KONG (Reuters Breakingviews) - How do you say “key-man risk” in Japanese? Investors might need to think about that. For now, they are relaxed about a land scandal involving Premier Shinzo Abe. But the episode highlights a vulnerability. The country’s ongoing grand economic overhaul is fashioned around a single man: it is called “Abenomics” for a reason.

The uproar centres on a nationalist education group, Moritomo Gakuen, which bought state land cheaply and whose head says he accepted 1 million yen ($9,000) from the first lady, Akio Abe. The Abes deny making such a payment or giving the school any undue assistance.

The market is not screaming political turmoil. As of early afternoon on Friday, the Topix index was down 0.5 percent since the controversy first began unfolding in mid-February. That is not much worse than a 0.4 percent rise in the MSCI World index.

Yet the furore is a reminder of how much Japan’s financial cheerleaders are invested in Abe, and his easy-money ally at the central bank, Governor Haruhiko Kuroda. Before Abe took over in 2012, a string of unpopular premiers lasted just a few months each. That made pursuing much-needed reform all but impossible.

In contrast, Japan now seems a beacon of political stability. Armed with high approval ratings, Abe has been able to push change in areas from agriculture to postal privatisation, and corporate governance. A poll earlier this week, before the latest details emerged, found his support ratings have fallen but were still relatively high at 56 percent.

Should Abe have to stand down, there is no obvious heir. The ruling Liberal Democratic Party has no standout candidates, though Tokyo’s mould-breaking governor could in time step up. The current default assumption is that Abe will try to win re-election and stay on past the 2020 Tokyo Olympics.

Any change at the top would not undo the progress made to date. But a replacement with weaker public or party support would find it harder to introduce new measures, and might encounter greater resistance inside the bureaucracy.

That matters because, despite the reforms so far, Japan’s economic revival is emphatically a work in progress. Growth, inflation, and profitability are too low, and the labour market too rigid. For investors, Abenomics without Abe does not sound so appealing.

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