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Double Abeloss

20 October 2014 By Peter Thal Larsen

Shinzo Abe’s plan to lure more women into the Japanese workforce just suffered a symbolic but high-profile setback. Two female ministers resigned on Oct. 20 just two months after they were elevated in a cabinet reshuffle. It’s another headache for the current Japanese prime minister, who is already grappling with stuttering economic growth. Yet some of his other reforms are moving ahead.

Two years after his return to political prominence, Abe’s plan to revive Japan’s economy is facing its most serious challenges. The prime minister’s decision to hike the sales tax by 3 percentage points to 8 percent in April has had a worse-than-expected impact on growth and consumer confidence. The broader slowdown in the euro zone and the rest of Asia has added to fears that Japan may slip back into deflation.

The deceleration has raised the political pressure on Abe to delay or even cancel the second hike in the sales tax, to 10 percent, scheduled for October next year. The prime minister told the Financial Times that another increase would be “meaningless” if it inflicted too much damage on the economy. Yet backing away from a commitment that is central to improving Japan’s long-term public finances could also knock the confidence of the international investors who have played a large part in reflating Japan’s financial markets.

At the same time, however, some of Abe’s biggest reforms are coming to fruition. For example, the country’s $1.2 trillion Government Pension Investment Fund is likely to raise its allocation to domestic stocks to about 25 percent, from 12 percent today. The move is an important symbol of Abe’s efforts to shift excess cash out of government bonds and boost funding for private investment. It may also help explain why, despite the political turmoil in Tokyo, Japan’s benchmark Topix index was up 3.8 percent on the morning of Oct. 20.

Maintaining the support of investors – and voters – will be key to Abe’s success. That should ensure that the latest setbacks for Abenomics are a speed bump, and not the end of the road.

(This article has been updated on Oct. 20 to include the second minister’s resignation.)

 

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