Apply political-capital discount to Abe’s cash

Tokyo has pulled out the stops to stave off bankruptcies and layoffs amid a deepening recession

  
Japan's Prime Minister Shinzo Abe wears a protective mask during a news conference at the prime minister's official residence in Tokyo, Japan April 17, 2020. Kiyoshi Ota/Pool via REUTERS

Japan's Prime Minister Shinzo Abe wears a protective mask during a news conference at the prime minister's official residence in Tokyo, Japan April 17, 2020. Kiyoshi Ota/Pool via REUTERS

HONG KONG - Shinzo Abe may be rich in financial firepower, but his political capital is deeply discounted. Japan’s longest-serving prime minister is prepping another $930 billion of fresh stimulus. Alas, his sinking popularity hobbles any chance of introducing important systemic changes.

Tokyo has pulled out the stops to stave off bankruptcies and layoffs amid a deepening recession. Abe estimated on Monday that the total package exceeds $1.9 billion, equivalent to nearly 40% of last year’s GDP. The central bank has promised to buy unlimited amounts of government bonds. Policies are targeting rent relief for businesses and incentives to retain employees.

All this generosity has done little to boost Abe’s political standing. Even his initial plan for cash handouts was criticised for being unfair and had to be rewritten. Public support for the cabinet has dwindled to 27%, per a May 23 poll by the Mainichi Shimbun newspaper. Abe’s attempt to extend the retirement age of public prosecutors did not go down well with the public after a top legal official resigned last week amid a gambling scandal.

Often when a government distributes money, it can demand concessions from recipients. It’s a great time, for example, to rewrite legislation that has restrained bank consolidation. Profit margins have been pounded thin by years of negative interest rates, with no end in sight. On average, lenders tracked by Refinitiv's Japan Banks index trade at 30% of book value, according to Breakingviews calculations. It would also be a good use of policy to encourage financial institutions to charge companies for their vast cash reserves on deposit.

Japan also would benefit by formally raising the obligatory national retirement age to 70. That would be more contentious, but then the typical Japanese pensioner now lives for over two decades after wrapping up a career. That creates a big fiscal burden.

All these efforts would fall under the metaphorical “third arrow” of structural reform that Abe championed alongside fiscal and monetary initiatives. At this stage he is not in a strong enough position to shoot it. Yet if he can rise again, as he has done before, Japan might get the economic upgrade it so desperately needs.

CONTEXT NEWS

- Japan is considering a fresh stimulus package worth over $929 billion that will consist mostly of financial aid programmes for companies hit by the coronavirus pandemic, the Nikkei newspaper reported on May 25.

- The country’s core consumer price index, which includes oil products but excludes fresh food prices, slipped 0.2% in the year to April, government data showed on May 22.

(Editing by Jeffrey Goldfarb and Jamie Lo) ((pete.sweeney@thomsonreuters.com; Reuters Messaging: pete.sweeney.thomsonreuters.com@reuters.net))

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