The Return of the Liberal Democratic Party (LDP) to the Diet: Will Shinzo Abe Reverse Japan’s Course?

Newly elected though not unfamiliar to the office, Japanese Prime Minister Shinzo Abe faces a daunting task ahead of him as his Liberal Democratic Party successfully retakes the reins of Japan’s government from the upstart Democratic Party of Japan.

The return of the LDP to power in Japan signals a shift back to the post-war era where the Liberal Democrats controlled the Diet for much of Japan’s modern history.

Abe’s recipe for turning around Japan’s fortunes are nothing terribly new from the LDP either: a strong influx of government infrastructure spending that will create thousands of jobs and generate much needed economic activity.

Secondly, Abe wants to up Japan’s inflation rate, or as Al Jazeera succintly describes:

[T]he central bank will commit itself to raising the inflation rate to 2.0 percent, buying as many Japanese government bonds or other assets as necessary to bring about this result. The goal is to reduce the real interest rate: the difference between the nominal interest rate that people actually pay on borrowed money and the rate of inflation.

Given the weakness of the Japanese economy it would be desirable to have a negative real interest rate; however, nominal interest rates will never fall below zero. People will not pay banks to hold their money.

Famous economist Paul Krugman first proposed targetting higher inflation as a desirable government policy in 1998; however, no government has yet put into practice his suggestions.

Additionally, in the realm of international relations, Japan is still grappling with the Senkaku/ Diaoyu Islands dispute with regional rival China and faces global challenges from neighboring South Korea’s powerful economy.


[Al Jazeera]