The September 12 announcement that Japanese Prime Minister Shinzo Abe will step aside brought cheers from those in Japan who oppose the logistical support Tokyo supplies for the war in Afghanistan. Economists, however, took the news with mixed emotions. During his short and tumultuous tenure, Abe met criticism on many counts—some blamed him for a flurry of scandals (AP) in his cabinet, while others called him overly nationalistic or indecisive. Yet Abe also pressed an ambitious economic reform agenda. In an April 2007 interview with the Washington Post, he described his economic goals, extolling deregulation and free-trade agreements. Until global market turmoil recently stung Asian stocks, the tack seemed to be meeting measured success. Some analysts even predicted the Japanese economy was finally emerging from years of crippling deflation.
Abe’s precipitous fall spooked the bulls. In late July, when his Liberal Democratic Party (LDP) met sweeping losses in upper-house elections, Japanese investors faced “paralysis” (Bloomberg) amid worries reforms would wither. Abe’s resignation further dampened (Thomas Financial) the mood—“concerns about the political instability are likely to continue to weigh on the Japanese stock market,” said one analyst.
Global market turmoil over the past month also sucked wind from Japan’s sails. Economist.com says “there seemed a measure of injustice to how Japan’s publicly trade financial funds were hit by credit troubles in the United States and Europe.” But hit they were—Japan’s benchmark Nikkei index dropped over 16 percent between mid-July and mid-August, and the country’s real-estate investment trusts, long considered a safe haven, also took a beating. As a result, Japan’s central bank has been forced to reconsider its approach. The idea that the Bank would raise its main interest rate, which economists both predicted and interpreted as a sign of confidence, now seems far from certain (Reuters). A recent paper by the Washington-based National Bureau of Economic Research adds that Japan’s consumer price metrics may be overstated and that the country might still be experiencing deflation even if some metrics suggest otherwise.
Abe’s replacement won’t be chosen until September 23. Some analysts say Taro Aso, the former Japanese foreign minister and current LDP general-secretary, is a likely successor, while others have singled out a moderate party elder, Yasuo Fukuda (WSJ), as a possibility. It remains unclear precisely what market-watchers could expect from Aso or Fukuda. Heizo Takenaka, the architect of some of Abe’s economic policies, told the Wall Street Journal that revisions to Abe’s reform agenda are nearly inevitable. Yet others seemed less certain whether Abe’s departure would kill reforms. Markets reacted mildly to the resignation. “People are assuming the new prime minister will be Aso, who will not be wildly different,” one analyst told the Financial Times. The article adds that the dream scenario for economists—which has been floated by Japanese media—is the reappointment of Abe’s “maverick reformist predecessor” Junichiro Koizumi.