The Abe Economy

I recently wrote an article on the LDP's thumping in Japan's July 29 upper-house elections.

I didn't get into the economic side of things, but it's worth a look. Bloomberg said market analysts faced "paralysis" following the vote, worrying that a lame-duck Abe might prove unable to press through the economic reforms he has targeted since taking helm.

Abe described his ambitious economic priorities in an interview with Lally Weymouth, published this April in the Washington Post:

We have expounded two basic pillars to enable Japan to grow in the future. We will deregulate to promote innovation, and we plan on establishing free trade arrangements and economic partnership arrangements with various countries.

We'd also like to facilitate foreign direct investment in Japan. Our plan is to double FDI over a five-year period. We will start implementing rules in May that will enable triangular mergers to be implemented in Japan. It's been said that the government in general has been active in impeding economic activity. My administration -- the [previous] administration also worked on this -- will present to the parliament a bill for reform of the civil service.

Needless to say, this kind of talk is music to the ears of international investors. As Abe himself notes, it's the same economic scheme implemented by his LDP predecessor, Junichiro Koizumi. A couple years ago, the Economist published a survey arguing that Japan's economic outlook was looking fairly bright under Koizumi's LDP leadership. This optimism was "not based on any notion that Mr Koizumi's victory represents the start of radical change...[but] the view that Mr Koizumi's victory is the culmination of a long period of incremental change, bringing welcome confirmation that that change is not likely to be reversed."

Now Abe's shaky start appears to have had precisely the opposite effect, spooking the bulls.