Abe’s political survival could be bad for Japan’s economy

The Japanese prime minister is blowing off resignation calls and plummeting support rates amid a year-long cronyism scandal that just won’t go away.

At least for now, Shinzo Abe is likely to stay in office. That is, barring additional blockbuster disclosures about the sale of public land at a deep discount to a school company with ties to his wife Akie.

The latest dustup is over doctored documents related to the 2016 sweetheart deal. But Abe has benefited from opposition parties being in disarray and a dearth of obvious replacements within his Liberal Democratic Party.

However, Abe’s deputy, Taro Aso, probably won’t be so lucky. The odds of Aso falling on the proverbial sword are rising as the howls of indignation in Tokyo grow ever louder.

Aso has two strikes against him. One, he runs the Ministry of Finance, which is at the center of the fudged-documents controversy. And two, he’s been, frankly, glacial about implementing the package of deregulatory reforms known as “Abenomics” since 2012.

That makes him vulnerable. In the kabuki of Japanese politics, this could make Aso a sufficient sacrifice to ensure Abe’s survival – at least for now.

The question is, what does this scandal mean for Japan’s economic reform process?

Odds are, it means additional barriers to Tokyo loosening labor markets, spurring innovation, cutting red tape, catalyzing a startup boom, empowering women and encouraging greater risk-taking among young Japanese.

Economy was never his true interest

There are two ways this can go. The optimistic case is that Abe will pivot back to the economy to restore public trust. His numbers tend to be highest when pushing his supply-side reflation scheme. Early moves to impose more international standards of corporate governance, weaken the yen via massive Bank of Japan easing and sell his “Japan is back” line to investors endeared him to a critical mass of voters.

But the PM’s approval ratings are now in the 30s range – Abe’s lowest ever, and in line with his pal Donald Trump’s.

The trouble is, the economy has never been Abe’s true interest. ‘Abenomics’ is really a splashy campaign to amass political capital to revise the pacifist constitution. Abe and his fellow nationalists abhor the U.S.-written document barring Japan from fielding a conventional offensive military. But every time Abe veers too far down that road, giving economic reforms short-shrift, his support suffers. So, the cronyism scandal could have a silver lining if it refocuses Abe on boosting competitiveness.

The second, and more likely, scenario is Abe resting on his laurels and further shelving upgrades. The economy is doing reasonably well thanks to a synchronized global recovery and heady demand from the U.S. and China. While it’s not boosting Japanese incomes – real wages fell 0.2% in 2017 – Abe can point to the second-longest postwar expansion, declare victory and pivot elsewhere.

That would be a grave mistake, given the dearth of self-reinforcing economic drivers. But sensing the twilight of his premiership is here, Abe could throw all remaining political capital at constitutional change. To tide voters over, and change the subject, Abe might sprinkle in some diplomatic gambles.

“Abe will aim to boost his popularity by showcasing his foreign policy strengths, starting with a meeting next month in Washington to discuss North Korea with U.S. President Donald Trump,” says Scott Seaman of Eurasia Group.

Abe fatigue

But “Abe fatigue” is real. And both of these geopolitical ploys could blow up on the government.

Kim Jong Un, for example, appears to be excluding Abe from any détente with South Korea and the U.S. So is South Korean President Moon Jae-in, who’s raising the idea of a three-way summit. There’s no talk of a chair for Tokyo. It would be humiliating for Abe’s legacy to be odd-man-out as Kim, Trump and Moon make history.

Abe’s huge bet on Trump, meanwhile, is backfiring spectacularly. No world leader bent the knee to Trump more enthusiastically than Abe. In return, Abe has gotten a mounting trade war, a weak-dollar policy imperiling exporters, Trump fawning over Xi Jinping’s strength in China and The Donald leaving him out of the loop as he courts Kim. Buyer’s remorse, anyone?

Even so, Teflon Abe’s government is likely to live to fight another day – at least based on what we know now.

The same can’t be said of Aso, and good riddance. But the real losers will probably be workers hoping for the return of Japan’s 1980s highs – and a decent raise. As Abe hunkers down, micro-economic retooling won’t be high on the to-do list.