Scandal Threatens to Throw Abe's Economic Agenda Off Course

(Bloomberg) -- The Japanese government’s plans for the economy -- an area of stability -- have been thrown into disarray by a cronyism scandal.

The controversy stemming from the sale of land to an educational institution with ties to Prime Minister Shinzo Abe threatens to derail March’s crowded policy calendar. Opposition parties are boycotting hearings on the budget for the fiscal year starting April 1, parliament has yet to confirm the Bank of Japan’s new leadership team, and the finance minister’s trip next week to a Group of 20 meeting in Argentina is in doubt.

Speaking in parliament on Wednesday, both Abe and Finance Minister Taro Aso denied ordering the doctoring of government documents related to the scandal. Opposition lawmakers are boycotting the session as the government refuses to call for testimony from the former finance ministry official who has been blamed for the scandal.

The administration also has to try to shepherd labor market reforms through the Diet after dropping key proposals due to erroneous data, and respond to U.S. President Donald Trump’s recently announced tariffs on steel and aluminum imports. Debate on constitutional revision and the submission of a bill on casinos are also likely to be delayed.

The scandal "will continue to inhibit the administration’s ability to move its agenda through the Diet," Tobias Harris, vice president at Teneo Intelligence in Washington, wrote in a note. Abe’s work reforms "could be shelved as opposition parties use parliamentary tactics to stall deliberations and force the government to address the Moritomo scandal," he said referring to the name of the school organization.

While Abe’s ruling coalition has the numbers in both houses to win votes on these issues, forcing through legislation without talking to opposition parties could further damage his popularity, which has been hurt by this scandal and another over fake job market data. While the budget will eventually become law, having already passed through the lower house, other bills related to spending need to be passed by both chambers.

Read more: Abe’s Government Under Fire as Japan Scandal Grips Inner Circle

The terms of two deputy governors of the Bank of Japan end on March 19 and their replacements Masayoshi Amamiya and Masazumi Wakatabe need be approved by both houses for them to assume their five-year terms the following day. Governor Haruhiko Kuroda’s new term -- starting April -- also has to be rubber-stamped. Any vacancy in the central bank’s leadership would be the first since 2008.

"I don’t think any short-term vacancy will affect monetary policy but it will be a symbolic sign of emerging political uncertainties," said Masaaki Kanno, chief economist at Sony Financial Holdings and a former BOJ official. "That won’t be welcomed by investors."

Read more: The School Scandal Haunting Japan Prime Minister Abe: QuickTake

The deepening scandal may also keep Aso from attending the G-20 gathering in Buenos Aires. His presence is needed there to negotiate issues from Japan’s strengthening currency to tariffs and the regulation of cryptocurrencies.

Aso, whose ministry is at the heart of the scandal, said Tuesday that his attendance at the G-20 would depend on the state of affairs in parliament. Opposition parties are calling for him to step down.

©2018 Bloomberg L.P.

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