Interest rates up, the LDP down | This Week in Japanese Politics

The Bank of Japan embarks on a new era, the LDP holds a glum meeting, and the US and Japan prepare for a state visit. Plus: the kickback scandal is no longer Japan's biggest scandal.

The Bank of Japan took a big step into a new era, although how big a step has been debated by experts and market participants. Prime Minister Kishida Fumio and his Liberal Democratic Party continue to look for a way out of a still worsening situation, while opposition parties continue to press for answers in the kickback scandal. The US and Japanese governments are preparing for Kishida’s visit to Washington — which will include the first-ever trilateral summit between US, Japanese, and Filipino leaders — but Japan may also be looking for progress in its bilateral relationship with China. Plus: say it ain’t so Shōhei!

Politics

Prime Minister Kishida Fumio addresses the LDP’s convention on 17 March.

The Liberal Democratic Party (LDP) held its annual convention on Sunday, 17 March, but the celebrations were muted in light of the extraordinary pressure on the party. Prime Minister Fumio Kishida opened with a lengthy apology for the scandal that has shaken the ruling party since December, but highlighted the progress made in boosting real incomes between wage increases and the forthcoming tax cut. A new Asahi Shimbun poll showed that the Kishida cabinet’s disapproval climbed to 67%, the highest level since December 2012, while the LDP’s support remained at the comparatively low level of 22%. The poll showed that as the party gathered, Kishida lagged five of his fellow party members in who the public prefers as LDP leader, polling only 5% compared with Ishiba Shigeru (18%), Koizumi Shinjirō (14%), Foreign Minister Kamikawa Yōko (9%), Digital Affairs Minister Kōno Tarō (9%), and Economic Security Minister Takaichi Sanae (7%). 31% of respondents, however, said none of the above.

Not only did Asahi’s poll show that the support for the government and LDP remain perilously low and Kishida out of favor – it also showed that the LDP could be in real danger of losing seats in a general election. Asked who they would support in proportional representation voting in a general election, the LDP polled 23% to 16% for the Constitutional Democratic Party (CDP) and 11% for Ishin no Kai. Add in the 4% support for the Japanese Communist Party (JCP), 5% for the Democratic Party for the People (DPFP), 8% for the Reiwa Shinsengumi, and 1% for the Social Democratic Party, and opposition parties are polling a combined 45% to a combined 28% for the LDP and its junior coalition partner Kōmeitō.

Shimomura Hakubun, a former Abe faction executive and ally of the late prime minister, testified before the House of Representatives’ deliberative council on political ethics on Monday, 18 March. After insisting on testifying, however, Shimomura’s appearance did little to clarify key questions about the Abe faction’s distribution of political funds, including when the practice began and how the faction decided to restart the scheme after Abe’s assassination. The Constitutional Democratic Party (CDP), dissatisfied with the testimony of Abe faction officials, is pressing for them to appear for the council again, with the support of other opposition parties. There is some disagreement, however, whether former prime minister and faction boss Mori Yoshirō should be asked to testify.

With the LDP opposed to holding another meeting of the ethics council, opposition parties – one vote short of the number of votes on the council needed to propose a new session – are talking with Kōmeitō to encourage the junior coalition partner to support their supports. The party is unhappy with the LDP – Kōmeitō leader Yamaguchi Natsuo criticized the testimony of Abe faction leaders in the lower and upper house deliberative councils on political ethics this week. “The people have not been convinced,” he said. “The result has been more and more distrust.” Yamaguchi also made an appearance at the LDP’s convention and warned that the current moment is the gravest test the coalition has faced since 2012. But Kōmeitō is thus far balking at breaking ranks with the LDP on reconvening the ethics council.

CDP lawmaker Azumi Jun speaks to reporters about an agreement among opposition parties to call for additional hearings on the LDP kickback scandal.

Kishida, weighing his options for punishing LDP members for their part in the kickbacks scandal, talked with LDP Secretary-General Motegi Toshimitsu and LDP Vice President Asō Tarō on Tuesday, 19 March about a plan to withhold the party’s endorsement for Abe and Nikai faction executives while delivering a formal warning to other lawmakers. The former punishment would be less severe than that meted out to the LDP’s “postal rebels” in 2005, who not only lost the party’s endorsement but also had to face “assassin” candidates and were expelled from the LDP altogether. Nikai Toshihiro is likely to be among those punished, although there is still some debate over how he will be punished. The question of whether Kishida, as the head of another faction whose treasurer was implicated, will have to be punished remains.

In response to a question in the Diet, Kishida said he would issue the punishments during the ordinary session of the Diet and would not call a snap election before they are handed down. Meanwhile, Kōno Tarō, a potential contender for the LDP’s leadership, said in an interview that it is urgent to mete out punishments quickly so to draw a clear distinction between what is right and wrong.

Ishiba Shigeru, another possible candidate in this year’s LDP leadership contest, has been increasingly vocal about the necessity of party reform. Not surprisingly given his longstanding popularity with LDP rank-and-file supporters and the broader public, he argued for changing the party’s rules to give the votes of the rank-and-file equal weight to parliamentarians. Ishiba has also announced the formation of a new study group, with roughly sixteen members pulled from his former faction and the former Nikai faction.

The former Asō faction, one of the two factions (along with the former Motegi faction) to survive as a “policy group,” has resumed regular meetings, highlighting the extent to which the LDP continues to exist in a liminal state of shadow factions and post-factional organizing.

Right-wing LDP members strongly criticized the Sapporo High Court’s ruling on same-sex marriage, suggesting that the process of getting the ruling party to support same-sex marriage will still be arduous, and that the issue could be a factor in this year’s leadership election.

The Japanese Communist Party (JCP) has decided not to field a candidate in the Shimane-1 by-election on 28 April and will instead “independently” back the Constitutional Democratic Party’s (CDP) candidate. With the LDP still struggling to find candidates for Nagasaki-3 and Tokyo-15, it increasingly appears that the Kishida government’s fortunes could rest on the results of a single by-election in Shimane, a longtime conservative stronghold that nevertheless looks like it could be hard fought.

Former prime minister Noda Yoshihiko urged the CDP and Ishin no Kai to coordinate their candidate selection ahead of the next general election, effectively dividing the electoral map into spheres of influence to avoid cannibalizing each other’s votes in winnable constituencies.

Economics

Bank of Japan Governor Ueda Kazuo speaks with the press following the BOJ’s policy board meeting on 19 March, at which the BOJ decided to end several of its unconventional easing policies.

The Bank of Japan’s policy board ended several Kuroda-era policies – negative interest rates, its yield curve control (YCC) interest rate targeting, and its purchases of exchange-traded funds (ETFs) and real estate investment trusts (REITs) – following its 18-19 March meeting. BOJ Governor Ueda Kazuo cited the robust outcome of the shuntō wage negotiations as a critical moment for prompting the bank’s decision. Kishida endorsed the BOJ’s decision on 19 March, which he may use to highlight his stewardship of the economy as he tries to revive his political fortunes. Nevertheless, even after the BOJ announcement, the Kishida government referred to the “full mobilization” of its policy toolbox to ensure that Japan truly escapes from deflation.

Contrary to expectations, however, the slight interest rate increase, the first in seventeen years, led the yen to weaken against the dollar rather strengthen, which may reflect the market’s belief that the BOJ’s commitment to continue purchasing long-term government bonds in order to prevent a sharp increase in interest rates suggests that monetary easing will continue even without the YCC program.

The yen’s movement following the BOJ’s announcement – briefly breaking past JPY 151 to the dollar – prompted Finance Minister Suzuki Shunichi to warn on Friday, 22 March that the Japanese government is watching exchange rate movements with a “high sense of urgency,” although he declined to comment on the possibility of intervention in the foreign exchange markets.

Governor Ueda refused to rule out the possibility of additional interest rate hikes later this year, with markets looking at the July or October meetings at possible occasions. With the Federal Reserve still projecting three interest rate cuts this year, the yen could eventually begin to strengthen.

The Bank of Japan’s decision will likely have significant implications for the fiscal policy debate within the ruling parties and government. Members of the LDP’s fiscal hawk and dove groups weighed in, staking out their positions in the new landscape. Meanwhile, the Cabinet Office could add fuel to the fire with a projection that interest rate payments on government debt could triple from JPY 7.6tn (USD ) to JPY 22.6tn (USD ) by 2033 if long-term interest rates climb to 3.4%. Even an increase to 1.5% through FY2028 could see interest payments grow by 50%. The Ministry of Finance and its allies in the LDP will likely press for fiscal consolidation as the BOJ continues to normalize monetary policy. In fact, on 19 March, a subcommittee – chaired by Obuchi Yūko – on “basic fiscal problems” of the LDP’s headquarters for the promotion of fiscal restoration met for the first time in two years.

The Japan National Tourism Organization (JNTO) reported that more than 2.78mn people visited Japan in February, a 7.1% increase relative to February 2019 and an all-time high for the month. However, the number of Chinese tourists declined 36.5% relative to February 2019; the increase was the result of significant percentage increases among Americans – presumably due to dollar strength – as well as Filipinos, Australians, and Taiwanese. However, South Koreans were more than a quarter of the total number of visitors.

The Ministry of Economy, Trade, and Industry (METI) has begun debating the next version of its basic energy plan, even as questions about the future of nuclear energy in Japan have reemerged following the Noto Peninsula earthquake in January. The Kishida government’s 2023 green transformation basic policy called for nuclear energy as a baseload power source, and METI’s energy plan will call attention to the government’s plans for restarting offline reactors.

Foreign and security policy                         

In addition to his state visit to the United States, Kishida will also hold the first-ever trilateral summit between the US, Japan, and the Philippines at the White House on 11 April, reflecting both deeper trilateral security cooperation as well as closer bilateral security relations between Japan and the Philippines.

The Kishida government could be signaling a willingness to stabilize Japan’s relationship with China, as a draft of the Foreign Ministry’s Diplomatic Bluebook uses the phrase “mutually beneficial relationship based on common strategic interests” – a key term dating back to Abe’s first premiership – to describe the bilateral relationship for the first time since the 2019 edition of the document.

Japanese and Chinese Foreign Ministry officials held working-level talks regarding China’s import ban on Japanese fishery products, imposed after Japan released wastewater from Fukushima Dai-ichi into the Pacific Ocean. The Japanese government also pressed for the release of Japanese nationals detained in China. No agreement was reached, but talks will continue.

National security advisor Akiba Takeo will visit Washington from 25-27 March ahead of the prime minister’s state visit, where he will meet with Jake Sullivan, his US counterpart and other officials. This follows a visit to Japan by Deputy Secretary of State Kurt Campbell, who met with his Japanese counterpart Okano Masataka on 21 March.

Further reading

The Asahi Shimbun looks back at findings in its opinion polls about Abenomics.

LDP lawmakers struggle to figure out life after factions.

Wakatabe Masazumi, a reflationist deputy BOJ governor from 2018-2023, suggests that the BOJ did not need to change course yet.

Brad Setser of the Council on Foreign Relations considers what the BOJ’s policy change will mean for Japanese demand for foreign bonds.

Richard Katz looks deeply at the logic behind the BOJ’s decision.

The Mainichi Shimbun has a Q&A on Tamura Tomoko, the first-ever female leader of the Japanese Communist Party.

Martin Sandbu looks back at how the Bank of Japan revolutionized monetary policy.

In the Wall Street Journal, Peter Landers and Yang Jie compare TSMC building projects in Japan and the US.

Of course, the biggest story in Japan this week was not the BOJ but the bombshell report of a gambling scandal that led the Los Angeles Dodgers to fire Mizuhara Ippei, Ohtani Shohei’s longtime interpreter and friend. Ohtani himself now faces major questions regarding his role, conveniently summarized at The Athletic.

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