THE BLOG

Political and Economic Battles Take Centre Stage in Japan

07/02/2014 12:34 GMT | Updated 09/04/2014 10:59 BST

There are few G10 economies that have gone through as much change in the past 15 months as that of Japan. Electing a new Prime Minister in Shinzo Abe, the country voted for a Liberal Democratic Party that is aiming to take Japan back to a position of economic and military strength. Sunday's election of a Governor for the Tokyo prefecture will likely see the LDP's candidate, Yoichi Masuzoe, take office.

Abe has not had it all his own way since coming to power, but still rides high in the polls. Both his economic strategy, known as 'Abenomics' to us economists, and his diplomatic policies, including his government's controversial plan for the Senkaku islands, a group of islands hotly contested between Japan and China.

Controversy was stoked when the Prime Minister visited the Yasukuni shrine in the centre of Tokyo. This shrine is said to hold the souls of those members of the Japanese military who lost their lives in the various historical conflicts Japan has been involved in. Two Sino-Japanese wars worth of souls are said to be there, and that's before we even get to the many more who perished in World War Two. This is place where emotion and controversy go hand in hand.

According to the BBC and Financial Times, at the recent Davos summit Abe claimed that the relationship between Japan and China was in a "similar situation" to that of Britain and Germany ahead of World War One.

This is all over the aforementioned Senkaku islands; uninhabited apart from a handful of seabirds. To understand the dispute is to understand Pacific military politics. Of course, the islands are close to oil and gas fields and offer abundant fishing opportunities for industry, but also afford each one of the claimants something much more important; power projection.

Any war in the Pacific will be fought between the countries' naval forces; there are more aircraft carriers, destroyers, cruisers and submarines in the Pacific Ocean courtesy of China, Japan, Russia and the US than anywhere else in the world. A base close to a combatant is worth its weight in warheads.

Hopefully there are no Archdukes or 'Black Hands' to further inflame the situation. And Obama's tour of the area in the coming weeks will hopefully act as a calming influence.

The islands are not a major issue in the Tokyo elections. However, the LDP's gains nationally will reflect well on Masuzoe. Tokyo's electorate will instead look at issues surrounding the economy - there are few elections that don't feature the economy as a key battleground, sugared as they are with the hope of prosperity.

The other hot button issues are the Olympics, awarded for 2020, and nuclear power. While the Olympic Games will allow significant infrastructure spending, especially in the damaged Tohuku area, the decision around nuclear power is the more important.

The Tohuku earthquake of 2011 had many political 'aftershocks', but none were more damaging as those through nuclear energy policy. The devastation wrought on the Fukushima plant and the ensuing environmental catastrophe led to protests in the streets and admissions all through Japanese politics that reliance on nuclear power needed to be reduced.

Since then, Japan has upped its imports of oil and gas in order to power its economy - a difficult needle to thread in an economy that has seen the value of its currency fall by 23% against the dollar since Abe took office. This all comes back to LDP's 'Abenomics' plan; fighting persistent deflation via a weakening of the currency in tandem with Bank of Japan spending, fiscal reforms and structural reforms in the longer run.

Tokyo's election will go the way the LDP want them to. It will take a lot longer to make the Japanese economy do the same.

Jeremy Cook is chief economist at the currency exchange company World First