Reuters: How the political scene and economy in Japan will be affected after the death of Shinzo Abe

The death of Shinzo Abe, who lent his name to “Abenomics,” a term for the policy mix that followed, makes any immediate challenge to his legacy highly unlikely, but could eventually allow Prime Minister Fumio Kishida to phase out the government’s spending and Abe’s monetary stimulus, according to a Reuters analysis.

In a rare act of political violence that shocked the nation, Japan’s longest-serving prime minister was assassinated on Friday while campaigning for Sunday’s parliamentary election, where his party’s coalition widened its upper house majority, according to exit polls.

Kishida is unlikely to do anything immediately to compete with lawmakers loyal to Abe, who leads the largest faction in Kishida’s Liberal Democratic Party (LDP) after he steps down as prime minister in 2020, analysts say.

But ultimately his absence and the LDP’s election victory, helped by a sympathy vote for Abe, could give Kishida the political capital to change course.

People close to Kishida said the prime minister and his aides want to move toward normalizing fiscal and monetary policy and gradually scale back the Abenomics experiment that began nearly a decade ago.

“There probably won’t be a quick reversal of Abenomics or an exit from ultra-loose monetary policy,” said Koya Miyamae, senior economist at SMBC Nikko Securities.

“In the longer term, however, the Bank of Japan needs to consider some form of monetary policy adjustment given issues such as the weak yen,” he said. “This means that former or current BOJ officials will remain strong candidates as the central bank’s next governors.”

Kishida, who belongs to the LDP’s smaller faction, remained under pressure from Abe and his supporters to maintain the massive stimulus and choose a “dovish” executive with a clear pro-rewarming stance as the next governor of the Bank of Japan. Japan in April.

Abe’s absence could change the balance of power within the party, reducing the influence of supporters of big government spending and ultra-loose central bank policies.

“Abe led a group of ruling party lawmakers who were in favor of big spending, so his absence will have a huge impact on the balance of power in the party,” said Daiju Aoki, chief Japan economist at UBS Sumi Trust Wealth Management.

Shifting balance of power

Buoyed by massive public support for his campaign to pull Japan out of chronic deflation, Abe rolled out his “three arrows” in 2013 – aggressive monetary easing, flexible fiscal spending and a long-term growth strategy.

The BOJ’s massive stimulus, led by governor Haruhiko Kuroda, has helped reverse the yen’s relentless rise that has hit Japan’s exporters, boost stock prices and improve the business climate. Economists, however, criticized the lack of a credible growth strategy and reforms that would help the economy shift sustainably into higher gear.

So far, Kishida has stuck to Abenomics, rolling out big spending packages to cushion the economic blow from the COVID-19 pandemic and more recently to cushion the effects of soaring energy and raw material costs.

He has also supported the BOJ’s ultra-low interest rate policy even as other central banks raise interest rates, sending the yen to two-decade lows.

“When we look at Japan’s gross domestic product, corporate profits and employment conditions, it is clear that Abenomics has produced great results. What is important now is to generate wage growth,” Kishida said in a televised broadcast on Sunday.

Ultimately, Kishida may seek to scale back some of the radical monetary experiments put in place by Kuroda, which have weighed on financial institutions’ profits and crippled bond market pricing.

Kishida’s government was forced to scale back Japan’s commitment to balancing the budget after a strong backlash from Abe and his allies. Abe’s death could clear the way for Kishida to focus more on efforts to curb Japan’s public debt, the largest in the industrialized world.

“Abe was a standard-bearer for those who support fiscal expansion. These people have lost their driving force,” said Mikitaka Masuyama, a professor at the National Graduate Institute for Policy Studies. “I wouldn’t say Kishida’s position within the party is unshakable, but now it’s more likely than before that he has better control of the party.”

While the BOJ is unlikely to reverse ultra-loose monetary policy anytime soon, the waning influence of pro-growth lawmakers could also affect Kishida’s choice to head the BOJ.

The prime minister has the final say on who will succeed Kuroda, who was chosen by Abe to develop a “monetary superweapon” to stamp out deflation when his second five-year term ends.

Masayoshi Amamiya and Hiroshi Nakaso, career central bankers, are seen among the strong contenders, with Amamiya seen as taking a softer stance than Nakaso – who has warned of the downsides of prolonged monetary easing.

“Abe is said to have preferred a renegotiated person to lead the BOJ. The shift in the ruling party’s balance of power could affect the choice of BOJ governor,” said UBS Sumi’s Aoki.