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Shrinking economy shakes confidence in Abenomics, may shackle PM's Constitution plans

Japan's economy shrank by 0.4 percent in the October-December quarter -- the second time the country posted negative growth in 2015 after another down quarter in the January-March period. Since the start of 2016, financial markets have been rattled by worries of economic slowdowns overseas, which could affect Japan's business environment as well. The economic growth engine of a low yen and high share prices promised by the administration of Prime Minister Shinzo Abe looks like it may be sputtering.

"Nobody knows which way the currency markets will go," says senior Mazda Motor Corp. executive Tetsuya Fujimoto. Fumiya Kokubu, president and CEO of trading giant Marubeni Corp., similarly told the Mainichi Shimbun that resource prices "have been volatile since the New Year. No one has any real idea where they'll be at the end of March," the close of fiscal 2015. Meanwhile, many of the corporate financial reports for the first three quarters of this fiscal year -- released between late January and early February -- warned of ever greater uncertainty about where the financial markets were going.

Meanwhile, slowdowns in the Chinese market and the economies of other emerging nations are influencing corporate performance. Already, electronics maker Hitachi Ltd. Executive Vice President Toyoaki Nakamura has said that "slowdowns in resource-based economies and in China" are behind Hitachi revising its projected earnings for fiscal 2015 downward.

Corporate sentiment in Japan is worsening as global stocks continue their New Year swoon and the yen inches up. According to the Bank of Japan, major Japanese companies -- including in the vital manufacturing sector -- are making their financial projections for the last two quarters of fiscal 2015 based on an exchange rate of 118 yen to the U.S. dollar. The yen is hovering around a significantly higher rate, and was trading at just under 115 yen at the time of writing.

The higher exchange rate further hampers already stagnant exports, while the bottom lines at export-oriented companies will also take a hit as the yen value of repatriated profits drops. The higher yen may also cool foreign visitors' penchant for Japanese shopping sprees -- counted as "exports" in Japan's gross domestic product (GDP), and which added 0.1 percent to the country's GDP in the last quarter of 2015. Japanese corporate caution may also impact the annual spring labor negotiations.

Meanwhile, also in the last quarter of 2015, consumer spending was even lower than that recorded in April 2014, when a sales tax hike from 5 to 8 percent took effect. If wage increases continue to lag, consumer confidence is likely to lag with them. At the same time, concerns over the Chinese economy that emerged last summer "have also blunted the consumer enthusiasm of high income earners," the Cabinet Office has stated. Global stock price erosion could hasten the so-called "reverse asset effect" (declines in paper wealth due to asset value depreciation) and make the wealthy less willing to spend. Whether the BOJ's negative interest rate policy, which went into effect on Feb. 16, will have any impact is unknown.

The negative GDP growth revelation has been a nasty shock for the government and ruling Liberal Democratic Party (LDP)-Komeito coalition, and the reason is a simple one: the Abe Cabinet's durable popularity has been built on a foundation of public expectations for a strong economic recovery. Seeing Japan's GDP slip and uncertainty about its immediate future could affect the Prime Minister's calculation on whether to call an early House of Representatives election for the same day as the summer House of Councillors vote.

"If the 'three arrows' (of the government's economic policy) are scrapped, it will set Japan's economy back three years, and bankruptcies will spike by 30 percent," Abe said during a Feb. 15 lower house Budget Committee meeting, in response to a question from the largest opposition Democratic Party of Japan (DPJ)'s Rintaro Ogata about plunging share prices. "If everyone compared (Japan's stock) prices to those before this administration took power, would they entrust the fate of the market to the DPJ, or to the Abe administration? The choice is clear."

The current government is polling higher than Abe's first, conservative ideology-tinged administration did back in 2006-2007, and even some within the LDP quietly call the present regime the "stock price Cabinet."

Prime Minister Abe has openly declared that constitutional revision will be a major issue in the upper house election. If he gets two-thirds of all sitting legislators -- including some from opposition parties with amendment sympathies -- to agree to proposals for changes to Japan's pacifist Constitution, Abe will be one very significant step closer to fulfilling his most deeply cherished political ambition. The prime minister's strategy is to fracture opposition party resistance ahead of the amendment push, and a close Abe associate put the chances of a lower house dissolution before the end of 2016 at "more than 90 percent."

This scenario, however, is premised on good economic times rolling across the country. One senior ruling party official told the Mainichi, "If low share prices torpedo the economy, there is no way we will call upper and lower house elections for the same day." Nevertheless, there remains a serious chance that Abe will dissolve the lower house while his Cabinet still enjoys high poll numbers, leaving open the possibility of an election for the lower chamber in 2016.

Abe has stated on numerous occasions that an April 2017 sales tax hike from 8 percent to 10 percent "will go ahead as scheduled unless something like the (2008) Lehman Shock hits." However, some, including a senior official at an economics-related agency, are beginning to mutter that "putting it (the tax hike) off would be better for stabilizing the markets and domestic demand" as the yen remains high and stock prices low.

Economic troubles have emboldened the opposition parties as well. DPJ Secretary-General Yukio Edano said on Feb. 15, "The numbers regarding (economic) conditions are a 180-degree reverse from the prime minister's cocksure pronouncements." He added, "Isn't it about time that the government stopped misrepresenting the real situation?"

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