LDP election should not bring immediate changes to Japan’s economic policies

The ruling Liberal Democratic Party (LDP) will elect its new leader at the presidential election scheduled today. The main concern has been that the LDP could lose seats at the next Lower House election scheduled this fall, as the Suga Cabinet’s approval rate dropped to 29% in August (Chart 1). Hence, the focus is to win the next national election with a new President.

On the back of these developments, the LDP is expected to be sensitive to opinion polls. In this regard, Kono, the vaccination minister, could take the new leadership role, supported by the highest approval from the public (Chart 2). Furthermore, he gained support within the party from Ishiba and Koizumi, who are also well regarded by the public. Although the political situation remains fluid, Kono could become the next president of the LDP and the Prime Minister of Japan (PM).

Regardless of the result of the LDP election, Japan’s economic policies are unlikely to change much in the short-term. With the risk of pandemic remaining high, the response to COVID-19 clearly remains the top priority. With a still fragile economy, there is limited room to implement meaningful structural reforms with the aim of improving potential economic growth but clearly at the expense of a short-term recovery. Furthermore, the BoJ ultra-lax monetary policy will continue to be decided under Governor Kuroda with his term lasting until April 2023 so Kono will have some time to figure out what to do with the economy while he deals with COVID-19.

Beyond firefighting on the pandemic, the key economic policy that Kono is proposing is to provide companies with incentives to raise wages by lowering the corporate tax rate. On the other hand, Kishida focuses on reducing the rising inequality through fiscal redistribution policies. Takaichi advocates to inherit Abenomics, by expanding the fiscal policy and temporarily freezing the fiscal goal to achieve a primary surplus in FY25. Noda promotes diversity and inclusion policies.

All in all, the LDP election could have important economic implications beyond the COVID-19?firefighting. If the LDP puts public opinion on their side to win the next Lower House election (Chart 2), they could nominate Kono as their new leader. Because the economic recovery continues to rely on exports, the relationship which China, Japan’s largest trade partner, will be key on the agenda. Furthermore, if the pandemic stabilizes, Kono might want to embark on structural reforms which would make Japan’s economic model more sustainable. This would require a very dovish BoJ, which could mean extending one more term for Kuroda.

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