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Elected to fresh term as LDP leader, Abe faces economic policy perfect storm

Prime Minister Shinzo Abe, left, chats with Deputy Prime Minister and Finance Minister Taro Aso before a Cabinet meeting on Sept. 21, 2018, the day after Abe was re-elected LDP president. (Mainichi/Masahiro Kawata)

TOKYO -- Prime Minister Shinzo Abe, re-elected to a third term as president of the ruling Liberal Democratic Party (LDP), faces tough economic challenges including Japan's trade surplus with the United States and balancing the debt-ridden state budget.

At a news conference following his Sept. 20 re-election, Prime Minister Abe expressed enthusiasm about his summit talks with U.S. President Donald Trump next week.

"We'd like to proactively discuss the future of Japan-U.S. trade relations and roles that our two countries should play in creating new international rules (on trade)," he said.

However, Trump is striving to keep his public pledge to reduce the U.S. trade deficit prior to midterm congressional elections in November. He could jack up the pressure on Tokyo to substantially reduce Japan's trade surplus with the United States.

It is highly likely that Washington will use threats of import curbs on Japanese automobiles and car parts at talks next week to try and force Tokyo into negotiations on a bilateral trade pact. Some observers predict the Trump camp will demand that Japan open up more to imports of agricultural products such as American beef and impose voluntary export curbs in return for exempting Japanese cars from import restrictions.

Prime Minister Abe repeatedly emphasized in his LDP leadership election speeches to regional audiences that Japan would "never make easy concessions on agricultural products." However, Japan is at a disadvantage because Washington can take Japan's highly profitable automobiles "hostage." U.S. import curbs on Japanese products would deal a serious blow to Japan's economy. One estimate projects that Japanese automakers such as Toyota Motor Corp. would suffer as much as 2 trillion yen in total losses should Washington impose import restrictions.

Trump has not compromised even with U.S. allies when it comes to trade deficit reduction. His administration used threats of car import limits to compel the European Union to expand imports of U.S. agricultural products such as soybeans. In reviewing the North American Free Trade Agreement, the United States forced Mexico to accept quantitative restrictions on car exports.

The Abe government will also struggle to restore Japan's fiscal health. In his campaign for a fresh term as LDP leader, the prime minister repeatedly underscored the significance of the Abenomics economic policy mix. "If companies profit from economic growth, wages for their employees will rise, which will in turn result in increased consumption and tax revenue. I want to make sure to get that virtuous circle going," he said.

Japan's export-oriented firms have seen improved business performance, spurred by economic recovery overseas and the lower yen, the result of the Bank of Japan (BOJ)'s drastic easy money policy -- one prong in the Abenomics mix. The Nikkei Index of 225 selected issues at the Tokyo Stock Exchange has risen past 23,000 yen, more than twice its value when Abe took power in December 2012.

In the meantime, Japan's state debts have snowballed over the same span as the government prioritized economic stimulus measures. Massive BOJ purchases of government bonds have kept long-term interest rates near zero. Even the prime minister has admitted that the BOJ must eventually exit from this extreme monetary policy.

Putting an end to such massive credit relaxation must be accompanied by measures to rehabilitate state finances. If the central bank were to decrease its purchase of government bonds while the government continued to issue a massive amount of debt, it would cause long-term interest rates to spike and throw the economy into chaos.

No time should be lost in efforts to balance the state budget, as Japan's social security spending is ballooning due to the declining birthrate and aging population. Nevertheless, the government's goal of achieving a primary balance surplus has been postponed from fiscal 2020 to fiscal 2025.

Experts forecast that Japan's economy, which the prime minister emphasizes is brisk, is likely to slow down following the Tokyo Olympics and Paralympics in 2020, which would make it increasingly difficult to rehabilitate Japan's finances.

(Japanese original by Daisuke Ando and Wataru Okubo, Business News Department)

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