(Bloomberg) -- The day after playing golf with Donald Trump this month, Japanese Prime Minister Shinzo Abe was no doubt looking forward to some good press to bolster his falling approval rating. Instead, most papers were focused on scandal.
The top headlines carried news that the highest-ranking bureaucrat at the Ministry of Finance had resigned due to allegations of sexual harassment -- the second major scandal to erupt from the ministry in two months. It was another sharp blow for Abe, whose poll numbers were already threatening his political survival.
The ministry and its controversial leader, Finance Minister Taro Aso, are at the center of a political firestorm. The public, opposition lawmakers and even some members of Abe’s Liberal Democratic Party are demanding accountability -- including Aso’s resignation and a restructuring of the ministry.
How it plays out could determine Abe’s future as prime minister, the fate of Abenomics and the Bank of Japan’s monetary policy.
Abe and the LDP have found "a convenient scapegoat" in the ministry, and the revival of longstanding calls to restructure it, primarily by splitting off its tax division, is a way to change the conversation, said Tobias Harris, vice president at Teneo Intelligence in Washington.
"This looks like the kind of thing where if you’re a confidence-fraught prime minister, you try to take on something like this -- but it reeks of desperation," Harris said.
The recent troubles began last month, with the revelation that the ministry had altered documents related to a controversial land sale to a school linked to the prime minister and his wife. Both have denied any knowledge or wrongdoing.
Then came allegations this month that the ministry’s top career official, Junichi Fukuda, the vice finance minister for administration, had been accused of sexually harassing female journalists. Fukuda has denied the allegations.
Through it all, Aso has faced widespread speculation that he would be forced to resign to take the blame. So far the 77-year-old, a member of an elite Japanese family who has a long record of controversial remarks, has survived. Recent public opinion polls found half of respondents thought he should step down.
"I think Aso will have to resign," said Hiroaki Muto, chief economist at the Tokai Tokyo Research Center. "The LDP has supported him until now, but lawmakers are starting to break off."
The turmoil has stalled the administration’s legislative plans. Opposition lawmakers are boycotting parliament -- until Aso steps down, they say. Significant bills like work reform -- already the subject of controversy over erroneous data -- and legislation related to the Trans-Pacific Partnership trade pact are awaiting passage.
The ruling coalition has enough votes to pass legislation by itself, but doing so without opposition input would likely cause the Cabinet’s support rate to drop even further, Muto said.
That LDP heavyweight Akira Amari is leading an intra-party committee looking at restructuring the finance ministry adds weight to calls for such a move. Splitting off the tax agency has been a longstanding LDP goal.
"The fact that they are in charge of tax collection makes them an intimidating organization for some LDP lawmakers -- not that they are dodging taxes," said Hiroaki Inatsugu, professor of public policy at Waseda University.
Abe had been expected to coast to victory in the LDP’s leadership elections in September. That has changed, with analysts now speculating about whether he will be forced to step down -- in September or sooner -- and how that would affect BOJ policy.
While Abe may yet prevail, it’s unclear if his government would be in a position to enact major policy changes, like an increase in the sales tax slated for 2019.
"The most likely case is that a weakened Abe administration will continue," Muto said. "The economy won’t be too strong, so they’ll keep putting off raising the sales tax. And meanwhile the Bank of Japan will keep pumping out money as it’s done up until now."
©2018 Bloomberg L.P.