As economic doubts grow, Japan's Abe seeks fresh mandate from voters

The prime minister has called a snap election for Dec. 14 and postponed a highly unpopular tax hike. Japan's economy slipped into recession this week, raising questions about Abe's centerpiece 'Abenomics' initiative.

Japanese Prime Minister Shinzo Abe has called a snap election and delayed an unpopular tax hike so that he can seek public approval for his growth-focused economic program, a day after the world’s third-largest economy slipped back into recession.

Mr. Abe said Tuesday that he would dissolve the lower house of parliament on Friday to pave the way for a Dec. 14 election. He will also postpone a second boost in the consumption tax, from 8 percent to 10 percent, until April 2017.

Japan’s gross domestic product (GDP) shrank by an annualized 1.6 percent during the summer months. That followed a 7.3 percent plunge in the second quarter. The two consecutive quarterly contractions are widely blamed on a 3 percent rise in the sales tax in April  – the first such hike in 17 years. The move caused consumers to rein in purchases, and raised concerns that Japan could return to the deflationary cycle that dogged its economy for two decades after the bursting of the 1980s asset-inflated bubble.

Some have questioned why the leader of a party with an unassailable parliamentary majority would want to go to the polls just two years into his four-year term. But by winning an early election – albeit with the likely loss of some lower house seats – Abe appears to be calculating that he will have a popular mandate for his growth-led economic program and thus silence, for now, those in his party calling for immediate action on Japan’s public debt.

That move carries risks, however, according to Tobias Harris, a Japan analyst at New York-based Teneo Intelligence. "A recession will give opposition party attacks on Abe more salience, suggesting the possibility that the ruling coalition could lose seats,” he says. “At present, the premier is stuck between an elite consensus that favors the tax hike and a public that is opposed to going through with the second hike next year.”

Indeed, Abe now finds himself walking a tightrope between growth and fiscal prudence. His decision to set aside the tax increase while he tackles more pressing economic concerns could backfire if wages fail to rise and consumer spending remains sluggish.

And he faces criticism that the centerpiece of his administration – Abenomics, a three-pronged program that combines government spending with cheap credit and structural reforms – is not working. Two years into Abe's term, big Japanese exporters have gained from the yen’s dramatic fall against the dollar and other major currencies, and investors have benefited from a recovery in share prices. But that has not been matched by wage increases, forcing many households to tighten their belts amid rising prices for fuel, food, and other essentials.

"It is clear that Abenomics has not had any positive impact at all on people's lives," argues the leader of the main opposition Democratic Party of Japan, Banri Kaeda. “It may be true that some corporations and high-income earners have benefited, but, on the other hand, are the majority of people better off? Are small and medium-sized businesses doing well?”

The prime minister cited a rise in employment and a growth in corporate revenues as proof that his policies were succeeding. But he could only say that wages and consumption – two key areas that have yet to see improvement – “should increase” over time.

In addition to criticism from the opposition, Abe may face battles with his Liberal Democratic Party colleagues. He acknowledged as much when he talked today of “fine weather” but with “high waves” – invoking the words of a Japanese admiral before his ships destroyed most of the Russian fleet in the 1905 Russo-Japanese war.

His finance minister, Taro Aso, is among the senior LDP figures who believe Japan needs to work through the short-term pain of a rise in the tax on goods and services in order to pay down its debt and free up funding for its creaking health and welfare systems.

The Bank of Japan’s governor, Haruhiko Kuroda, and the International Monetary Fund have also urged Japan to demonstrate its commitment to paying off its public debt, now twice the size of its economy and the largest in the developed world.