The presidential election of the Liberal Democratic Party (LDP), which will essentially decide who will become the departing Kishida Fumio’s successor as Japanese prime minister, is becoming a crowded field. At the moment, seven LDP parliamentarians, including Cabinet members from the Kishida administration, are expected to throw themselves into the ring. Depending on whether some other hopeful contenders can amass 20 public endorsements – a minimum requirement to participate in the LDP election – the field could grow even more. Candidates must formally join the race by September 12.
As stalwart members of the LDP, all contenders will agree on basic principles and policies, such as constitutional revision and a robust alliance with the United States, but there is also distinct division in one particular field – notably, economic policy.
There are the so-called fiscal hawks, which are represented by contenders such as Kono Taro and Ishiba Shigeru – both of whom have already announced their candidacy – and Motegi Toshimitsu, who is expected to join the cohort. The “hawks” argue for a restrained monetary policy that will improve Japan’s debt situation, which has ballooned in recent decades, and recommend that the Bank of Japan raise interest rates both in order to curve inflation and achieve fiscal stability.
Even before the BOJ announced its most recent rate hike at the end of July, Kono and Motegi have been arguing for such measures. Moreover, at the press conference where he announced his candidacy, Kono stressed the need for fiscal discipline, presenting a hallmark feature of the “hawks.” Ishiba has been even more consistent and passionate in his economic stance. A long-time rival of former Prime Minister Abe Shinzo, Ishiba has been a vocal critic of “Abenomics,” which heavily relied on monetary easing.
The fiscal doves have a vastly different view on monetary policy. From the perspective of the doves, a group largely populated by ideologically conservative members of the LDP, the extraordinary monetary easing is a cure for decades-long deflation that has limited Japan’s economic growth. In this view, Japan’s recent inflationary spiral should be seen as a sign that the seed that conservative icon Abe planted is starting to bear fruit. And as heirs to Abe’s legacy, the doves believe that they should continue his monetary easing and increase public spending that would contribute to the revitalization of the Japanese economy.
The contender that most represents the dovish perspective is Kobayashi Takayuki, previously Kishida’s economic security minister. Kobayashi, the first individual to officially announce his candidacy for the LDP presidential election, laid out his dovish monetary view in his manifesto policy. Declaring that “the economy takes priority over finances,” he promised to “boldly invest in local regions” and “thoroughly support SMEs to increase their profits,” leaving no doubts that fiscal discipline will be treated as a secondary goal in a Kobayashi administration.
Along with Kobayashi, Takaichi Sanae, a nationalist politician who was Abe’s preferred contender in the 2021 LDP election and is seeking a second chance this year, is a staunch supporter of dovish monetary policy. In 2022, even as the cost of living was starting to rise due to external factors, such as the pandemic-caused supply chain disruption and the Russia-Ukraine war, Takaichi unapologetically stated that Abe’s policies had been working, and thus Kishida should continue to sustain the extraordinary monetary easing. On fiscal policy, too, Takaichi is as dovish as Kobayashi appears to be; she is expected to argue for “aggressive fiscal stimulus” when she declares her candidacy.
Historically, the fiscal hawks represented the majority opinion of the LDP. From 1960 to 1996, four out of the 16 LDP prime ministers were alumni of the Ministry of Finance, and ten of them were once the head of the same ministry, which prioritized fiscal responsibility as an organizational priority throughout the post-war period. Among them, Ohira Masayoshi was most adamant in achieving fiscal prudence, which led him to propose large indirect taxation, including a consumption tax hike that did not sit well with the public.
However, in recent decades two main factors have led to the rise of dovish economic policy within the LDP. First was the economic downturn during the 1990s. In the early ‘90s, as a result of the market crash, and plummeting real estate value, Japan’s financial sector, whose portfolio was biased toward real estate, suddenly was burdened with a massive debt problem. In order to resolve the situation, the LDP government became generous toward increasing public expenditure – and thus opened a window of opportunity for future dovish economic policy. That’s why the issuing of bonds has shown an upward trend since the 1990s.
The second factor was Abe Shinzo. Since the mainstream of the LDP and the economics orthodoxy had favored the hawkish side of the economic policy debate, for a long time, the doves were considered “losers.” In fact, the LDP’s economic doves were indeed described as such since their ranks were filled with bureaucrats or politicians that were considered fringe characters, according to Ono Nobukatsu‘s book, which profiled the rise of the doves.
That changed in 2012. Abe – who was ousted from power in 2007 after his government’s heavy focus on conservative red meat rather than bread and butter issues for the many — was attempting a comeback. He saw dovish economic policy as a breakthrough from the economic malaise that confronted Japan, but also a policy platform that would show he had actually learned from the mistakes made in his first term.
The fact that Abe’s signature economic policy package, Abenomics, included pillars such as “aggressive monetary policy” and “flexible fiscal policy” – incorporating the features of dovish economic policy – signaled a major victory for the doves, who were able to convert Abe to become one of them. Although the two goals that Abenomics aimed for — “Get rid of Deflation” and “Wealth Expansion” – were not fully materialized, the bold monetary easing in concert with the BOJ significantly pushed up stock prices and contributed to Abe’s continued success in the polls. And as his power in the party was cemented, and the number of like-minded conservatives grew in tandem, his views on economics morphed into the mainstream conservative position.
However, although the fiscal doves had a huge sway over Japanese economic policy under the Abe administration, his death seems to have retracted their influence. Following Abe’s death, Kishida replaced Haruhiko Kuroda – effectively Abe’s monetary policy czar – with Kazuo Ueda, who appeared to be considerate to conservative demands for monetary easing during public hearings, but initiated major revisions to Japanese monetary policy. Moreover, the slush fund scandal, which a large swath of Abe faction members – mostly fiscal doves – were complicit in, may further decrease the influence of the doves.
The continuation of dovish economic policy seems unattainable at this current juncture. Although the Western industrial societies had maintained extremely low interest rates since the recession of 2008, as inflation raged on, they have once again increased their rates to tame it – leaving Japan behind and imposing downward pressures on the yen, as well as raising costs on the imported goods that Japan is heavily dependent on. And even though the textbook policy to control inflation would be to increase interest rates, the massive government debt has rendered it difficult for Japan. Doing so would further increase the interest expenses of the bonds, which already constitute 24 percent of the national budget.
Given Japan’s current situation, the economic solution would be to gradually increase interest rates while making the public expenditure less reliant on government debt. However, in spite of the reality of the Japanese economy, conservatives who are going to run in the LDP leadership race are arguing hard for policies that seem to run in the opposite direction. The fact that policies that are debased from reality are being advocated shows that dovish economics has become more of an important tenet of Japanese conservatism than a rational economic policy that meets the test of time.