Post-Summit Decisions for Prime Minister Abe

Japan’s prime minister, Shinzo Abe, returned to Tokyo this weekend after his first summit meeting in Washington with President Barack Obama. Post-summit, Abe faces two important economic decisions. The first is his nomination for the next governor of the Bank of Japan (BOJ). The second is whether Japan’s prime minister will urge his party onwards to participation in the Trans-Pacific Partnership (TPP). To succeed, Abe now has to confront some political hurdles at home.

The lack of a majority in the Upper House will mean Abe needs to ensure his BOJ head passes muster with his political opposition. Nominations for a new BOJ governor require approval from both houses of parliament. Abe’s Liberal Democratic Party (LDP) has a firm majority in the Lower House after its sweeping victory on December 16, but the last time the LDP sought to replace the head of Japan’s central bank it ran into paralyzing opposition in the Upper House. In 2008, the LDP sought to replace then retiring BOJ governor Toshihiko Fukui with Toshiro Muto, a former vice minister of finance, but the opposition-controlled Upper House voted him down. This forced then prime minister Yasuo Fukuda back to the drawing board, and in the end, the current BOJ governor, Masaaki Shirakawa, then a vice governor at the BOJ, became the acting head. Shirakawa has announced he will step down on March 19.

Japanese and global media have been full of speculation over Shirakawa’s replacement ever since the prime minister publicly called for a much more aggressive use of monetary instruments to end Japan’s deflation. Inflation targeting by the BOJ is one of Abe’s preferred policy goals, a core idea in what is now widely referred to as “Abenomics.” Kikuo Iwata, a professor from Gakushuin University, was seen as a bold choice for Abe, according to Bloomberg, since he has called for “a ramping up in Japan’s monetary base to end deflation.” But the name that has recently emerged as the likely pick is a man who was also a contender in 2008, Haruhiko Kuroda, the current head of the Asian Development Bank. Kuroda served in the Ministry of Finance where he managed currency policy from 1999 to 2003, and is on record then arguing that the BOJ should introduce inflation targets. Interestingly, even when LDP-DPJ bickering was at its worst, Kuroda managed to attract opposition party support. It appears Abe will make the politically wise choice and put the more experienced and internationally well-known Kuroda as governor, while nominating the more academic and policy aggressive Iwata as vice governor.

On TPP, the politics are more precarious for the prime minister. In an unusually terse Joint Statement after the Abe-Obama meeting, the two governments confirmed their understanding of the terms of Japan’s participation:

Recognizing that both countries have bilateral trade sensitivities, such as certain agricultural products for Japan and certain manufactured products for the United States, the two Governments confirm that, as the final outcome will be determined during the negotiations, it is not required to make a prior commitment to unilaterally eliminate all tariffs upon joining the TPP negotiations. [The full statement is available here.]

While it leaves much to be desired in terms of syntax, it was apparently enough for most of Japan’s media to believe that their prime minister had just received a major concession from the White House. All of Japan’s major newspapers reported forward momentum coming out of the summit meeting, and Abe’s consultations with coalition partner Komeito president Natsuo Yamaguchi on Monday demonstrated his intent to move quickly. By evening (Tokyo time), Prime Minister Abe had received his party’s approval for his government to make the final decision on when to participate in the TPP. Expectations now are for an announcement at the beginning of March.

Whereas the BOJ nomination provided some short-term political feuding, it is unlikely to be a serious conflict in the Diet. The DPJ leadership has already indicated it understands the public will not be forgiving if politics were to leave the BOJ position unfulfilled for any length of time, and it seems the DPJ has no objection to Kuroda.

The real political risk will be the prime minister’s decision on TPP. With an Upper House election in July, the LDP could suffer at the polls if key supporters, most notably the agricultural cooperatives that benefit from government protections for their activities, remain adamantly opposed.

Opinion polls suggest that anywhere from 60 to 65 percent of the Japanese people support participation in TPP, and the prime minister is gaining in public support (70 percent and rising after his Washington trip). Japan’s business leaders also openly call for Japan’s participation, and Abe himself seems buoyed by the stock and currency markets’ response to his “Abenomics.”

In Washington, Mr. Abe declared that “Japan is Back!” It may be too early to declare economic victory, but politically, he has certainly changed the tenor of Japan’s domestic debate. With a TPP decision seemingly forthcoming, it seems Mr. Abe is gambling on boldness. Let’s see if he can carry his party—and its constituents—with him.