Abe’s expected election win means more bullet trains for Japan, fewer deep reforms

By Stanley White

TOKYO (Reuters) – An election victory for Japan’s ruling coalition this month could give Prime Minister Shinzo Abe a mandate to pursue bolder economic policies, but he’s likely to choose big-ticket infrastructure items over more pressing structural reforms.

The global financial shock caused by Britain’s vote to leave the European Union last week will also give politicians a suitable pretext to choose quick hit stimulus – like high speed rail projects – over more politically contentious reforms that address labor and competition.

Economists now worry Abe is missing a chance to accelerate much-anticipated structural reforms, the so-called third arrow of “Abenomics”, which were meant to tear down barriers to higher potential growth and productivity.

“Abe’s original growth strategy had good elements but we haven’t seen much follow through,” said Marcel Thieliant, senior Japan economist at Capital Economics in Singapore.

“Low interest rates give the government more incentive to spend than to push reforms.”

Polls show the Liberal Democratic Party (LDP) will likely gain more than twice as many votes at the July 10 poll as the biggest opposition Democratic Party in the upper house election.

The LDP and its coalition partner Komeito already have 136 seats in the 242-member upper house. Half of all seats are up for election, and the coalition needs only 46 seats to keep its majority.

Combined with his control of the more powerful lower house, Abe will have no trouble passing the “comprehensive and bold” stimulus package he promised for this autumn.

Negative government bond yields from the Bank of Japan’s negative interest rate policy mean Abe can borrow more without being punished by the bond market.

MORE TRAINS, OFF TRACK

Japan is considering increasing an economic stimulus package that will be drawn up later this year to more than 10 trillion yen ($97.96 billion), higher than the 5-10 trillion yen it was originally considering, government and ruling party sources told Reuters on Monday.

The LDP has pledged 30 trillion yen in public-private investment over five years to expand the already extensive Shinkansen bullet train network and bring forward construction of an experimental maglev train.

Shoring up infrastructure in Japan’s many natural disaster-prone areas, as well improving working conditions for child-care and aged-care workers could also feature, according to an LDP source.

Although the stimulus package’s contribution to gross domestic product (GDP) growth could be a modest 1 percentage point or lower, it is still a welcome boost for an economy that has a potential growth rate of just 0.2 percent.

However, economists also worry spending on more railways takes “Abenomics” further away from its original focus of fixing deeper structural economic problems.

Indeed, many proposals – particularly structural policies that open the labor market and industry to foreign participants – face strong resistance from entrenched business lobbies or cultural traditions, making them much more difficult to legislate than stimulus packages.

“Infrastructure and natural disaster spending will help, but I am not sure this will help fix fundamental areas of the economy,” said Betty Wang, economist at Standard Chartered in Hong Kong. “The main problem lies in the labor market.”

Temporary workers accounted for more than a third of all employees last year, up from 20 percent in the 1990s, and their low pay has been a drag on consumption.

Abe is taking steps to narrow the gap in wages and conditions between permanent and temporary workers, but the International Monetary Fund and other economists want more aggressive policies, such as cutting job protections for permanent workers to increase labor market churn.

Others are calling for deregulation to boost competition in a range of sectors such as healthcare, aged care and child care and enable greater choice in the insurance industry.

Yet many are losing hope that Abe’s third arrow will ever fly.

“The government’s plan for reforms was so vague you never understood what they were trying to do, so it’s difficult to achieve much,” said Taro Saito, director of economic research at NLI Research Institute in Tokyo.

“I honestly wish the government would not go ahead with stimulus spending because a lot of this money will go to waste.”

(Editing by Sam Holmes and Shri Navaratnam)