Editor's Note: This assessment is part of a series of analyses supporting Stratfor's upcoming 2019 Third-Quarter Forecast. These assessments are designed to provide more context and in-depth analysis on key developments over the next quarter.
Japan will hold elections for the upper house of the country's legislature, the National Diet, this summer, likely in July. Without a formidable opponent and only half of the seats in play, there is little risk of a major upset for Prime Minister Shinzo Abe's Liberal Democratic Party (LDP). But a particularly strong showing at the polls would give Abe the freedom to finally proceed with some of his longstanding wishes before the end of his third term, which include constitutional reforms, raising the consumption tax and tamping down U.S. trade pressure. But regardless of the election outcome, Abe will find that Tokyo's close alliance with the United States will continue to hinder his government's diplomatic outreach to China, Russia and North Korea.
Japan has become a key middle player in the United States and China's intensifying great power competition. With several domestic and foreign policy questions hanging in the air, the country's upcoming legislative elections will be a pivotal moment for Japan's ruling Liberal Democratic Party, as its outcome will determine how the government will proceed on the bolder items on its agenda for the remainder of its term.
The Final Push
Having held power for the majority of the past 64 years, the LDP has long enjoyed a monolithic position in Japanese politics. And with Abe at the helm, the party's as strong as ever. The voices of once-raucous intraparty factions have quieted, and the opposition parties remain in disarray. Its supermajority coalition in the National Diet's lower house and its strong upper house majority both look to hold steady for the next two years.
Abe, meanwhile, is on track to become the country's longest-serving prime minister. Yet despite having the votes to advance much of his agenda, Abe's most ambitious domestic policies have so far been limited due to repeated scandals at home, along with concerns that they might damage public support by appearing too aggressive.
In the lead-up to the upper house vote in July, the LDP will continue to carefully avoid any measures that could dampen voter sentiment — focusing instead on touting Abe's global standing. But with lower house elections not required until October 2021 and Abe's own tenure secured until September 2021, the time after the election will begin the last window for Abe to make the most out of his last two years in office.
Going into the summer vote, the state of the Japanese economy will be of top concern for both the LDP and voters alike. It unexpectedly grew at an annualized rate of 2.1 percent in the first quarter of 2019 and has avoided tipping into negative annual GDP growth since 2012. However, low household spending, recent wage declines, the ongoing U.S.-China trade war and declining global demand put Japan's continued robust growth in question.
Following the upper house elections, the Abe government has vowed to proceed with plans to raise the country's consumption tax from 8 percent to 10 percent later this year. The tax hike, which has been delayed since 2015, is intended to help pad government budgets as social spending rises to meet the needs of the country's aging population. But opponents of the increase have said that it could dampen consumer spending and tip the economy into recession, as a previous tax hike did in 2014. And with exports down, the Japanese economy will have even fewer buffers to weather any dropoff in domestic consumption brought on by higher taxes on goods and services.
A strong electoral performance would enable Abe to pursue more controversial economic policies and constitutional reforms before the end of his term.
Despite the potential risks, the LDP has nonetheless signaled its plans to push ahead with the tax hike unless the economy looks set to suffer a downturn on par with the 2008 global financial crisis. And the healthy economic figures in recent months will give the party room to follow through. However, if the LDP loses seats in the upper house vote, it may reconsider pursuing such a politically contentious move. If Abe feels the consumption tax needs a clearer mandate, there's even a chance he could call lower house snap elections simultaneously with the upper house elections, which would push both votes into August.
With the goal of increasing Japan's ability to assume a more assertive regional position, the LDP has long sought to remove entirely or revise the wording a post-World War II article of the country's constitution, which renounces the use of the military as a tool of foreign policy. After much back and forth, the party has settled on revisions that would shore up the legal status of the country's self-defense forces. Abe has pledged to have these reforms in place by 2020 — a promise he first made in 2017 and recently reiterated at a rally in May. But with the end of his third (and likely last) term as prime minister drawing near, time is quickly running out to make progress in meeting this deadline.
The LDP's supermajority in the lower house technically gives it the clout needed to push through its reforms and prompt a nationwide referendum (which is required for constitutional revisions). To ensure success in such a vote, the LDP has proposed a bill in the legislature's Commission on the Constitution that would allow for more polling places across the country and make it easier to advertise the referendum to voters. However, debate over the bill has been stalled since January as opposition parties have boycotted commission meetings.
In May, the LDP decided not to submit the legislation during the current Diet session to avoid ruffling more feathers before the upcoming elections. However, a strong LDP showing in those polls in the upper house — and a long stretch before the next vote in October 2021 — would give the party time to pass this law in the late-year Diet session and open the path to constitutional change. In doing so, the LDP will also likely use the recent imperial transition replacing Emperor Akihito — a long and potent symbol of Japanese post-war pacifism — to promote its vision of a more militarily-minded Japan.
U.S. Trade Talks
On the trade front, Japan has found itself the target of White House pressure to trim its trade surplus with the United States and broaden domestic market access for U.S. goods and services. Under U.S. President Donald Trump's threat of steep automotive tariffs, Tokyo relented to bilateral negotiations toward a trade agreement in late 2018, and talks between the two countries have since been ongoing. During negotiations, Washington has pushed for agricultural access on par with the Comprehensive and Progressive Trans-Pacific Partnership, as well as less palatable measures on currency manipulation and trade with China — while Japan, for its part, has pushed for reciprocal access to the U.S. market for its industrial goods.
Thanks in part to Abe's own diplomatic outreach to the White House, Washington recently agreed to delay the 25 percent auto tariff hike until November. This — combined with the United States' increased focus on China and latest turn against Mexico — has given the LDP a reprieve from the contentious trade talks until after the upper house contest, thereby allowing the party to avoid potential backlash from the agricultural sector and others who risk losing out in a deal with the United States.
However, once the Japanese elections are complete, the clock will be ticking for Tokyo to strike a compromise with the White House, which will be under its own pressure to produce results as the country swings into the 2020 U.S. presidential elections. In this, Tokyo will likely push for as narrow a trade deal as possible — most likely by relenting on Washington's demand for increased access to the Japanese agricultural market.
Abe has built his political reputation on being a leader with clout and personal influence on the world stage, justifying his longstanding tenure in his post. The June 28-29 G-20 summit in Osaka, to be held just a month before the likely election date, will be a key opportunity to showcase Japan's global stature, as Tokyo works to position itself as a middle power that can play a mediating role between the United States and China.
But much of Abe's foreign policy agenda remains relatively lackluster, limited partly by Japan's status as a stalwart U.S. ally. In May, Abe renewed efforts to initiate long-frozen outreach to North Korea, saying he would meet leader Kim Jong Un without any preconditions. That outreach, however, is unlikely to go anywhere. Japan has long been a target of particular North Korean ire, given its colonial and World War II-era history on the Korean Peninsula. And the stagnation of both Washington and South Korea's outreach to Pyongyang will make it even less likely to succeed. Abe is also unlikely to score any wins on the Russian front either. Moscow's concerns with Tokyo's U.S. alliance — which President Vladimir Putin recently called an "enduring barrier" to negotiations — has continued to curb hopes for resolving the Southern Kurils territorial dispute with a World War II peace treaty.
Proceeding With Caution
That said, the upcoming summer elections will serve as a juncture after which Abe and his ruling party will have more breathing room and a longer runway to move forward with its legislative agenda. However, a strong showing at the election will not solve all of the party's problems, given the potential for economic troubles at home and diplomatic challenges abroad.