Shinzo Abe Dissolves the Parliament

Shinzo Abe, the Prime Minister of Japan has just dissolved the lower house of his country’s parliament. This paves the way for his decision to have a snap election next month.

This move to elections comes after data is indicating the economy of Japan, which is the third largest in the world, has retreated back into a recession in the third quarter. This is after Abe’s sales tax hike back in April. This hike has beaten consumption and sales have slipped, which has depressed factory orders and industry.

This week, Abe postponed the next tax hike for 18 months. It was supposed to happen in October of 2015.

The dissolution of the lower house makes its 480 members jobless. The election date is scheduled for December 14, as expected. This decision has confused many voters as they were not expecting to go to the polls for two more years. However, the sales tax hike was very unpopular. Still, Abe’s main opposition the Democratic Party of Japan (DPS) is very weak and his Liberal Democratic Party (LDP) is expected to win. Giving Shinzo Abe a new mandate.

So why is he doing this? His opposition parties are in total disarray and cannot win. His poll numbers, despite the tax hike, are still strong and the postponement of the next consumption tax hike gives him the excuse not to go for another one. Abe needs time for his Abenomics to work and kick start Japan’s long stagnating economy into growth.

Abenomics has had about two years to work. We have seen some signs it has and some signs it has not. The massive and awe inspiring quantitative easing program (QE) has supported the stock markets, the Nikkei has soared to record highs, but the yen is very weak. While not a bad thing, because it makes its export products attractive, it has not bolstered inflation as it is far below the target of two percent, set by the Bank of Japan (BOJ).

The tax hike was initiated to reduce Japan’s massive debt load but has backfired. As mentioned above, retail sales have collapsed and has depressed the economic recovery, which was not great to begin with. In order for Abenomics to work it has to focus on monetary policy. There has to be an end to deflation and once that is done, economic malaise should start to wane and growth will return. If Abe pushes to hard, then he will increase the supply side but his demand side will remain weak. This will hamper growth.

Basically he needs time for his reforms to take hold and by calling for elections, he will get the time he needs with a fresh mandate. This is a smart move by Shinzo Abe. The only problem with the snap elections is that Abe will have difficulty pushing his womenomics, which is the return of women to the workforce. He needs to speed this process up.