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Could an Embattled Abe Hurt Japan?

Japanese Prime Minister Shinzo Abe is facing his biggest political crisis since taking office more than five years ago, in a scandal involving a land sale to a school operator.

 

Abe has denied that he or his wife – Akie – intervened in the heavily discounted sale of state-owned land to the school operator or that he sought to alter documents related to the deal. However, weekend opinion polls showed support for Abe's cabinet declining to 31% as the majority believes he bears some responsibility.

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Citi analysts believe that Abe could survive the ongoing scandal and win the Liberal Democratic Party (LDP) presidential election in September. But the political outlook from there on will probably depend heavily upon how the approval ratings for the Abe administration play out in the coming months. For example, if the approval rating stays in low-30% range, there could be a return to factional politics in the LDP.

 

If either LDP policy chief Fumio Kishida or former defence minister Shigeru Ishiba replaces Abe, fiscal policy could likely be materially different – according to Citi analysts.

 

According to Citi, the next economic stimulus package – which is expected to be announced simultaneously with the decision to implement the consumption tax hike as planned – could probably be smaller under Ishiba or Kishida than under Abe. However, any near-term impact on monetary policy could likely be limited.

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