Abe's victory doesn't bode well for Japan's long-term economic health

Japan’s Liberal Democrats, the ruling party led by Prime Minister Shinzo Abe, won a landslide victory in Sunday’s upper house elections
But Marcel Thieliant, a researcher at Capital Economics, says the election result is “no reason to cheer,” and that Abe’s victory will be a detriment to the economy.

This is mainly because Abe’s crushing victory will allow him to keep avoiding necessary structural reform in favour of continued fiscal stimulus, according to Thieliant.

The Liberal Democrats campaigned in this election with the pledge to continue “Abenomics,” Abe’s plan to revive Japan’s economy that includes fiscal stimulus, monetary stimulus, and structural reforms. But they used similar language in 2014 after they won elections in the Lower House, and there’s been little progress on structural reform since then.

Instead, Abe’s government will most likely continue to use increased spending to revitalize the economy. “With little prospect for a sweeping overhaul of Japan’s economy, hope for any near-term improvement in the outlook rest on prospects for aggressive fiscal stimulus,” Thieliant states.

Indeed, Abe ordered a new round of fiscal stimulus spending right after winning the election, causing the yen to plunge early Monday morning.

Thieliant predicts that the looser fiscal policy will accelerate GDP growth from 0.5% this year to 0.8% in 2018 — but that the spending will then level off or fall, causing a renewed slowdown in GDP growth to 0.5% in 2018.

“If we are right,” the report concludes, “Japan’s economy will expand at a slower pace during Mr Abe’s current stint in power than it did in the preceding decade.”

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