(Bloomberg Gadfly) -- The deepening Moritomo Gakuen school land-sale scandal could put an end to Abenomics.
Japan's Finance Minister Taro Aso refused to step down on Monday after it was revealed staff at his ministry had ordered the alteration of documents linked to the sale of government-owned property to the nationalist school operator. Prime Minister Shinzo Abe said he wants Aso to take responsibility for the investigation.
The market reaction so far to the growing mess has been muted, with the Nikkei 225 Index on Tuesday maintaining Monday's 1.7 percent gain and the yen holding steady.
After all, Japan is no stranger to political upset. Prime ministers rarely survive longer than five years and Abe has already passed that threshold thanks to his deft ability to survive scandals. His ruling Liberal Democratic Party's approval rating is at 48 percent, 6 percentage points lower than last month but much higher than it was in July, when there was widespread talk of him resigning.
There's a risk traders are becoming complacent, however. If Abe falls, we could see a reversal of monetary easing that could cause the yen to strengthen to 100, the level being eyed by currency bulls.
Abe survived last July's abysmal popularity rating after Defense Minister Tomomi Inada resigned following allegations she helped to suppress the release of sensitive defense documents. Aso won't go so easily.
A former prime minister and highly ambitious, Aso is positioning himself as a kingmaker in party elections this September. If Aso feels Abe is abandoning him to save his own skin -- particularly since Aso appears to have had no direct role in the Moritomo land sale -- he could back one of Abe's rivals and bring an end to his bid to become the country's longest-serving leader. According to Teneo Intelligence analyst Tobias Harris, "Aso is no Abe loyalist."
Neither is he a fan of Abeonomics. Aso has famously blamed "people who don't give birth" for Japan's aging-population problem, a direct snub to Abe's Womenomics initiative. Wikipedia even has a separate controversial statements section for his home page.
For now, at least, the first and most important arrow of Abenomics seems to be in place. Abe has appointed Haruhiko Kuroda to a second five-year term at the Bank of Japan, so zero interest rates will be around for a while. Nikkei 225 bulls are also comforted by the central bank's 6 trillion yen ($56 billion) annual purchase of equity ETFs, providing the stock benchmark support even if the yen strengthens.
But would Kuroda be as loyal if his boss were gone?
He's clearly worried that unprecedented monetary easing may be going too far. In November, he ruminated in public about the negative consequences of keeping interest rates too low for too long. Earlier this month, he said the central bank would start thinking about how to exit its huge monetary stimulus program around the fiscal year starting in April 2019.
Yen bulls, meanwhile, are just waiting to pounce. How can the currency be so weak if Japan's current account surplus is near a decade high while the fiscal deficit in the U.S. is poised to worsen?
As the Moritomo school scandal gathers steam, Abe would be wise to tread carefully. Ultimately, it's his legacy at stake.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Shuli Ren is a Bloomberg Gadfly columnist covering Asian markets. She previously wrote on markets for Barron's, following a career as an investment banker, and is a CFA charterholder.
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