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Analysis: Big poll win for Japan PM Abe's party could defeat bold economic reform

Japan's Prime Minister Shinzo Abe is seen through reporters as he speaks during a news conference at his official residence in Tokyo June 26
Japan's Prime Minister Shinzo Abe is seen through reporters as he speaks during a news conference at his official residence in Tokyo June 26

By Linda Sieg

TOKYO (Reuters) - Will the real Shinzo Abe please stand up?

Abe, back as Japan's premier in a rare second term, is expected to lead his ruling bloc to victory in a July upper house election, but what he will do with the mandate is a puzzle.

Pessimists fear too decisive a win will weaken commitment to reforms needed to end the stagnation that has long plagued the economy.

The risks are twofold.

First, a massive victory by Abe's Liberal Democratic Party (LDP) could generate complacency even as swollen ranks of conservative lawmakers strengthen the hand of the vested interests that have long been the LDP's core constituencies.

Second, Abe may use his mandate to push a conservative agenda centered on revising the pacifist constitution - recognizing Japan's right to maintain a military - and recasting its wartime history with a less apologetic tone, distracting from difficult economic reforms.

"If they win, the government will be very stable, but stability creates laxness," said former Economics Minister Hiroko Ota, a member of an advisory panel on deregulation - touted by Abe as a key component of his "Third Arrow" growth strategy.

The first two "arrows" in the "Abenomics" policy prescription were hyper-easy monetary policy and fiscal spending, neither of which faced much political opposition.

"The issues that remain face strong opposition and that is why they were not possible so far," Ota told Reuters. "That is why we need to remain intensely on guard."

Pledging to revive growth in the world's third-biggest economy, bolster its defense posture and alter the constitution, Abe took office after the LDP's general election win last December. That was just over five years after he abruptly resigned from the country's top job due to ill health and a humiliating loss in an election for parliament's upper chamber.

But the LDP and its junior partner, the New Komeito, still lack a majority in the upper house, which can block legislation. Abe and his allies need a win there both to end the "twisted parliament" that has foiled policy implementation since 2007 and to wipe away the bitter memory of his earlier defeat.

THIRD ARROW DOUBTS

Buoyed by a stellar win in Sunday's Tokyo local election, the LDP and New Komeito look on track for a solid majority in the upper house contest. Some political sources say Abe's party may win a majority on its own.

Pessimists fear that too big a win for the LDP would bolster the opposition to regulatory reforms from lawmakers with close ties to industries and sectors that would suffer from change.

"Winning the upper house election is not the key to pushing through the structural reforms that Japan needs because the vested interests are only going to get stronger," said Jeffrey Kingston, director of Asian studies at Temple University's Japan campus.

Others, such as LDP lawmaker Kozo Watanabe, said a big win would give Abe the clout to push unpopular economic reforms such as steps to make it easier to fire unproductive employees and downsize away from unprofitable sectors.

"We can't do it now, but if the LDP and New Komeito win a majority, we can do it," Watanabe said.

The party and Abe's advisers are divided between those who favor old-fashioned industrial policies with the government targeting winners, and a pro-deregulation camp that wants the government to get out of the way to spur innovation.

Financial markets disappointed by the "Third Arrow" measures want to see signs the latter group is gaining the upper hand. "What markets will be looking for is a very clear commitment to specific medium-term, growth boosting structural reforms," said Alastair Newton, senior political analyst at Nomura Securities.

"There has to be more substantive delivery in the reform agenda once the election is out of the way to sustain the more positive sentiment about Japan."

REFORM AGENDA - BUT WHICH REFORM?

Abe aides say he has learned a harsh lesson from his troubled 2006-2007 term, when his focus on revising the U.S.-drafted constitution, promoting traditional values and fostering patriotism in education instead of pocket-book policies close to voters' hearts was a key reason for his early exit.

Few believe, however, that the priorities of the 58-year-old grandson of a prime minister have fundamentally altered. Some still fear he will be tempted to spend political capital on contentious policies such as lowering the legislative hurdle to constitutional revision as a prelude to revising Article 9 to loosen limits on the military.

Observers also wonder whether Abe will visit Tokyo's Yasukuni Shrine on the August 15 anniversary of Japan's World War Two defeat, a pilgrimage he avoided as premier the first time. A visit to the shrine, where Japanese wartime leaders convicted as war criminals by an Allied tribunal are honored with war dead, would inflame tensions with China and South Korea, which suffered under Japan's past militarism.

"Structural reform would be easier to promote (if the ruling bloc wins big) but the question is, what is his agenda?" Junji Annen, a Chuo University Law School professor who sits on the same deregulation panel as Ota, told Reuters. "Is it economic revitalization or constitutional reform? Only Abe knows."

The two, however, may not be mutually exclusive. Abe's agenda also aims to boost Japan's regional and global security clout but exercising influence - especially in the face of a rising China - requires a strong economy.

"A country that has lost economic power cannot maintain its national power," Abe told a news conference on Wednesday, adding he would focus on reviving the economy after winning the poll.

"To ensure national power and pride, we need to regain a strong economy."

(Additional reporting by Kaori Kaneko, Tetsushi Kajimoto and Kiyoshi Takenaka; Editing by Ron Popeski)

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