(Bloomberg) — Japan’s ruling party chooses a new leader for the nation Friday as its members decide whether to continue inching away from an over-reliance on central bank support, speed up a sluggish reform process or reverse course back toward oversized stimulus.
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The leadership election will set the stage for a new premier who will need to steer the nation through a period of transformation as it emerges from three decades of stagnation and faces mounting diplomatic and security challenges.
A record nine candidates are contesting the Liberal Democratic Party presidential election. Outgoing Prime Minister Fumio Kishida said last month he wouldn’t seek a second term as his approval ratings sagged due to a party slush-fund scandal and persistent inflation. Whoever wins the LDP poll is all but certain to be approved as prime minister by parliament in a vote expected on Oct. 1.
The favorites include Sanae Takaichi, who argues that the economy still needs aggressive pump priming. If she wins, Takaichi would become Japan’s first woman prime minister.
Japan could also get its youngest postwar prime minister in 43-year-old Shinjiro Koizumi. He has little high-level government experience and has campaigned on a platform of deregulation to foster the growth of start-ups and new business sectors, such as ride-sharing.
Another front-runner, Shigeru Ishiba, has called for an Asian NATO to deter China and North Korea. He wants to focus on revitalizing Japan’s rural regions by providing incentives for young people raised in provincial areas to stay there rather than relocate to major cities.
Former Prime Minister Taro Aso intends to have his faction vote for Takaichi, the Sankei newspaper reported Friday. The yen continued to weaken against the dollar in morning trading in Tokyo. Japan’s currency fell to around 145.52 per dollar, versus 144.80 at the start of the day.
“The depreciation of the yen is a move in preparation for a Takaichi victory in the LDP leader election,” said Akira Moroga, chief market strategist at Aozora Bank.
Signs of a resurgence in the world’s fourth-largest economy have reignited enthusiasm for Japan as a global investment destination. Wages and prices have returned to growth, the stock market is revisiting levels not seen since the 1980s, and the central bank has wound down its unorthodox monetary stimulus program.
But the new prime minister will also face persistent deep structural problems, not least an aging and shrinking population, stubbornly low levels of productivity and economic polarization. Growing military threats from China, Russia and North Korea will also demand the new leader’s attention.
With a national election due sometime in the next year, the candidates have all sought to appeal to the public with proposals to boost incomes and accelerate growth. Most have pledged to quickly put together a package of economic stimulus measures. Takaichi has also called for the Bank of Japan to pause its policy normalization process to support growth.
Among the other pressing issues for the new leader will be the need to strike up a cooperative relationship with the US and whoever succeeds President Joe Biden in the November presidential election. The US is Japan’s only security treaty ally and has its largest permanent foreign military presence in Japan, with around 55,000 troops.
All of the candidates have emphasized a consolidation of the US alliance, but relations have been put under strain by Biden’s assertion that he would block an attempt by Nippon Steel Corp. to buy United States Steel Corp. Takaichi and Koizumi are among the candidates who have said that domestic political concerns in the US during an election year may be affecting the Nippon Steel bid.
Fraying ties with China emerged as a key theme late in the LDP election campaign period after the fatal stabbing earlier this month of a Japanese schoolboy in China. All of the candidates have called for a full investigation and demanded steps to protect Japanese citizens.
Tensions have also been inflamed after Chinese military aircraft made an unauthorized entry into Japanese airspace for the first time last month. And this week Japan reportedly sent a warship through the Taiwan Strait for the first time, a move all but certain to anger Beijing.
During speeches and debates in the campaign period, policy differences between the candidates have often been hard to distinguish. But a clear divide has emerged on the issue of whether to allow married couples to keep separate surnames, a question that has become a litmus test for how far candidates may be willing to accept a more diverse Japan. Koizumi and Ishiba support a change, while Takaichi doesn’t.
Despite the array of internal and external challenges for Japan, one of the dominant themes of the campaign has been party reform following revelations of secret payments to lawmakers who were part of groups known as factions. The dismantling of most factions has created one of the most competitive races for party leadership in decades.
–With assistance from Hidenori Yamanaka.
(Updates with currency moves ahead of polling)
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