Japan – Constitutional Reform Still a Priority

On July 10, voters cast ballots to fill one-half of the seats in the 242-member House of Councilors, the upper house of the Parliament, and delivered a convincing victory for the incumbent LDP, which together with its coalition partner, Komeito, and the support of smaller parties and independents now claims the two-thirds majority required to approve changes to the constitution. In that regard, Abe’s primary objective is repeal of Article 9, which prohibits Japan from maintaining a standing army or using military force for non-defensive purposes.
Any changes made by the Parliament must be approved by voters in a referendum. Abe’s plan is very controversial, and recent polling data indicates that some two-thirds of voters oppose the changes proposed by Abe. In addition, a signal from Emperor Akihito that he would like to like to settle into retirement before his failing health makes him unable to fulfill his royal duties has created pressure for lawmakers to put repeal of Article 9 on the back burner, and instead prioritize changes to the constitutional provisions related to royal succession.
The emperor is reported to oppose Abe’s plans for constitutional reform, but is legally prohibited from becoming involved in political affairs. There is speculation that Akihito has intentionally raised the abdication question with the aim of side-tracking the debate on Article 9. Indeed, any serious examination of changes to the rules of succession will fuel demands for an amendment that permits female heirs to take the throne, further complicating matters.
If Abe does manage to steer his preferred reforms to implementation, the impact on foreign relations within the region will be significant. In addition to ratcheting up tensions with China, the prospect of a militarized Japan will also affect relations on the Korean peninsula.
Investors will be eyeing these developments with caution, as the lack of progress on Abe’s structural reform agenda gives rise to concerns that a battle over constitutional reform will distract the government from the task of rejuvenating the economy and addressing the country’s massive debt burden. The government has relied on fiscal stimulus, reinforced by the Bank of Japan’s quantitative easing, to keep the economy growing, but policy makers will need to press ahead with moves to raise long-term growth potential, reduce sovereign liabilities, and invigorate a labor market hampered by low participation and wages if it is to have any chance of achieving its targets of 2% real GDP growth, 2% inflation, and the elimination of the primary budget deficit by 2020.
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