Is third term a charm for Japan’s Abe?

Japan’s Shinzo Abe unleashed a bull market in metaphors on Sunday as he announced his run at a third term for prime minister. He did so in front of Mount Sakurajima, an active volcano showing signs of eruption.

Since December 2012, Abe has been threatening to burst open a fossilized economy. Instead, his Abenomics plan to defeat deflation and spur innovation has been more smoke and ash than big bang. While reforms to tighten corporate governance helped, steps to expel the gases below Japan Inc’s surface have been more tentative than magmatic.

Some might find Abe’s choice of locale unfortunate for another reason. Mount Sakurajima is near the southwestern Japanese island of Kyushu, a place that, like all too many, hasn’t benefited much from Abe’s prioritization on monetary stimulus over deregulation. For locals, “Abenomics” is more economic molehill than momentous return to prosperity.

Yet Abe is sure to win in a walk on Sept. 20, the day the Liberal Democratic Party holds its leadership elections. Thanks to a dormant opposition, there is really just the LDP, and a disparate bunch of ragtag parties, none worth even mentioning here. Inside the LDP, now that Abe, 63, appears to have mastered a string of scandals, the only thing standing between him and the party’s presidency is Shigeru Ishiba, 61, a former LDP defense chief.

That shouldn’t be hard. Mikitaka Masuyama of the National Graduate Institute for Policy Studies speaks for many when he predicts a “landslide victory for Abe.” Ishiba’s platform of ideas is decidedly inactive. Abe, polls by Kyodo News and others show, enjoys the backing of 77% of LDP lawmakers. Another Kyodo poll finds that 36% of Japan’s 127 million people support Abe. Not great, but enough to stay on to become Japan’s longest-serving prime minister.

Here are the three biggest issues at stake should Abe win.

The economy

Considering how little heavy lifting Abe did when his approval rating was near 70%, it’s hard to see him taking 36% out for a big, visionary ride. Inevitable as his victory may seem, Abe is in Donald Trump territory, support-wise.

The best one can reasonably say about Abe’s economic record these last five-plus years: it’s complicated. He started off firing a samurai metaphor at voters, involving three arrows. While shooting a few arrows at a target might achieve goals, three fired simultaneously gets the job done.

The first, historic monetary easing, was deployed early. Tokyo 2020 Olympics construction accounted for the big fiscal stimulus shot. But the third and most vital arrow – structural reform – remains largely in the quiver.

Abe talked big about loosening and internationalizing labor markets, cutting red tape, catalyzing a startup boom, narrowing the gender-pay gap and increasing productivity. However, he slow-walked all of these difficult upgrades, betting that Bank of Japan easing and a weaker yen would get the job done.

In that regard, Abe’s team has been luckier than right. Epic yen-printing coincided with a rare synchronized global recovery, helping Japan Inc. export its way to stable growth. Until the 0.2% first-quarter growth contraction, Japan had grown for nine straight quarters. But relying on trickle-down economics tends to concentrate the benefits among the top 5%.

Credit where it’s due: Moves to modernize corporate practices, including a UK-like stewardship code, are boosting returns on equity. Yet CEOs are still too unconvinced by reforms to raise wages, starving Japan of the virtuous cycle Abenomics envisioned. When they do share profits with workers, it’s via bonuses, not salary increases.

Another Abe win also has caveats. He managed to stay in – and essentially lead – the Trans-Pacific Partnership after US President Trump pulled out, and in July, he signed one of history’s biggest free-trade deals with the European Union.

Yet freer trade may lower prices at a moment when Japan is struggling to achieve 2% inflation. Abe will have to accelerate reforms to offset forces driving costs lower.

Constitutional change

Abe’s pet passion is to amend Japan’s pacifist constitution, one foisted on Tokyo by post-war US occupation leaders. This, too, is complicated. Abe’s grandfather Nobusuke Kishi was a wartime cabinet member. Through quirks of history, Kishi avoided war-criminal status to become prime minister from 1957 to 1960. Abe’s driving force has long been to make Japan a “normal” country that can field a conventional military.

This, notes Gerry Curtis, a Japan expert at Columbia University, is Abe’s only concrete agenda item. Yet 73% of Japanese are cool to that idea, making this goal an uphill slog. All-encompassing, too. That’s likely to leave even less time for Abe to roll up his sleeves and modernize the economy.

As the Mainichi newspaper observed in a recent editorial: “One has no choice but to feel that something is amiss with maneuvering that appears to treat the constitution, the country’s highest law, as a political tool,” when the economy is the real issue.

Here, Trump’s bluster and naivete could work in Abe’s favor. Trump’s erratic behavior has shaken Tokyo’s faith in the US-Japan alliance. That could provide a popular tailwind for Abe’s dreams of revising Article 9 of the constitution (which outlaws war as a means to settle international disputes involving the state). As Trump’s anger grows over the scandals and investigations dogging his White House, will he try to change the subject by attacking Pyongyang or Tehran?

In an editorial, the Japan Times raised the specter of the “famous ‘wag the dog’ scenario in which a US president wages a small war to shift focus from domestic troubles.” Even if real war is unlikely, the editorial continued, “an intensification of trade disputes is not. This may be the greatest threat to Japan, given Trump’s longstanding view that this country trades unfairly and his mounting desire to pursue a bilateral free-trade agreement to remedy those perceived problems. The Abe administration must prepare for this possibility.”

Getting along with the neighbors

Normally, China and South Korea would be cool to nationalist Abe winning a third time. Officials in Beijing and Seoul still seethe over Abe’s 2013 visit to the Yasukuni Shrine for war dead, which neighbors see as a symbol of Tokyo’s wartime aggression.

In Tokyo political circles, Abe gets great credit for his restraint in not visiting since. Around Asia, not so much.

But the “Trump effect” may change the calculus. It’s not that China’s Xi Jinping and Korea’s Moon Jae-in suddenly see Abe as a natural ally. But Trump’s trade war have Beijing, Seoul and Tokyo talking again. In May, the three rivals held their first trilateral summit in more than two years.

Any real thawing in relations may rely on Abe’s diplomatic priorities. His efforts to befriend Trump are blowing up spectacularly with each new round of tariffs on steel, aluminum, Chinese goods and, perhaps, 25% levies on car imports. Hence Abe’s efforts to keep TPP alive and even add members (albeit, neither China nor South Korea are likely candidates).

Abe’s policies may be more reactionary than proactive, depending on Trump. Trump imposing taxes on autos and parts, says Scott Seaman of Eurasia Group, would have Tokyo’s political and business circles clamoring for a change in policy toward a White House that doesn’t have Japan’s back. Might that drive Abe into the arms of Xi? It’s possible.

Yet the ultimate question is whether a third Abe term is what Japan needs.

There’s an argument, made assertively by Japan bulls like Jesper Koll of equities fund WisdomTree Japan, that “the answer is stability.” Fair enough. Yet, standing before that volcano on Sunday, Abe let something rather momentous slip: “It is my responsibility to respond to the mandate of the people.”

Were that true, Abe would be 100% focused on using the best opportunity Japan has had in decades to build a more vibrant economic future. That’s his mandate. And yet Abe’s focus is on extricating Japan from its wartime past, an effort that won’t raise wages or competitiveness.

So, the best way to view a few more years of Abe is – well, it’s complicated.