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Analysis: Even as election spells Japan PM win, big reform may lose out

Japan's Prime Minister Shinzo Abe, who is also leader of the ruling Liberal Democratic Party, speaks to voters atop a campaign van in Tokyo
Japan's Prime Minister Shinzo Abe, who is also leader of the ruling Liberal Democratic Party, speaks to voters atop a campaign van in Tokyo

By Linda Sieg

TOKYO (Reuters) - Prime Minister Shinzo Abe is likely to win a mandate on Sunday for his three-part recipe to end stagnation in the world's third-biggest economy, but anyone expecting him to use it to push a "Big Bang" reform agenda may need a reality check.

Abe's Liberal Democratic Party-led bloc is expected to win a hefty majority in a July 21 upper house election, ending a "twisted parliament" in which the opposition controls the upper chamber. Media surveys published on Monday showed the LDP maintained a substantial lead over rival parties.

That stalemate has hampered policies for most of the past six years since Abe, then in his first term as premier, led the LDP to a humiliating 2007 upper house defeat. He resigned two months later and was followed by a string of short-term leaders.

Abe, who returned to office in December for a rare second chance, will have few excuses for shying away from reforms including deregulation that many see as vital to generating growth - but his commitment to doing so remains in doubt.

"What's required is the kind of thorough-going reform that Mr. Abe doesn't seem to have the vision or stomach for," said Jun Okumura, a senior advisor for Eurasia Group and former bureaucrat at Japan's trade and industry ministry.

"Just because he wins an election doesn't mean vested interests will be any more amenable to changes that would affect them negatively," he said. "A leader can do a lot with the ability to appoint and dismiss cabinet members and ultimately, the right to call a general election.

"But I don't see Mr. Abe as that kind of leader."

Hopes for his "Abenomics" prescription of hyper-easy monetary policy, big spending and steps to promote growth pushed up Tokyo share prices and weakened the yen even before his LDP-led bloc won a December poll for the powerful lower house.

"ENRICH THE COUNTRY, STRENGTHEN THE ARMY"

Business executives and economists welcomed his decision in March to join talks on the U.S.-led Trans-Pacific Partnership (TPP) free trade pact despite fierce opposition from the farm lobby, a traditional backer of the LDP.

Advocates say joining the pact would open Japan's economy to competition and boost momentum for deregulation to spur growth.

"TPP is not about agriculture reform, it's about whether Japan sits at the table when global rules are made and doing whatever it takes to be a first-rate power," said Jesper Koll, head of equities research at JP Morgan in Tokyo.

"That's what fires them up."

Abe has also backed reform of the energy sector that would break up regional utility monopolies, also powerful LDP supporters - although a political scuffle just before parliament ended in June prevented the reform bill from passing.

Optimists argue the desire of Abe and like-minded nationalists for a strong economy to ensure Japan's place on the global stage will keep up pressure for reform - a sort of 21st century version of the "Enrich the Country, Strengthen the Army" slogan of the late 19th century reformers who modernized Japan.

"I think he sees a genuine challenge to the sovereignty and power of the country," said Robert Feldman, chief economist at Morgan Stanley MUFG in Tokyo.

But reaction to Abe's "Third Arrow" of structural reforms unveiled in June has been tepid, prompting the premier and his aides to promise that more is in store after the upper house election.

Among the areas where critics want bolder steps are agrarian land reform, labor market measures to make it easier for firms to exit loss-making business and shift to growth sectors, cuts in the corporate tax rate and an easing of barriers to immigration to cope with Japan's ageing, shrinking population.

ACHILLES' HEEL ON HISTORY?

Reform advocates also worry about potential backsliding on promised steps such as energy market reform. "The LDP might change some part of the (utilities reform bill) so it doesn't have so much impact on incumbent utilities," said Hiroshi Takahashi at Fujitsu Research Institute, who sat on an advisory panel that recommended the reforms incorporated in the bill.

A split among Abe's growth strategists between those who see a big role for government in picking and backing new growth sectors, and those who want government to get out of the way to allow innovation, also clouds the outlook for reform.

Ironically perhaps, too big a victory on Sunday could make it harder for Abe to push through the sort of reforms that would harm traditional LDP supporters. Such a win would increase party complacency along with the number of MPs with ties to vested interests.

Some media forecasts give the LDP a shot at winning an upper house majority on its own for the first time since 1989. With no national poll required until 2016, LDP members keeping quiet now ahead of the election are likely to become more vocal afterwards.

"Are we dealing with Japanese politics" the answer is 'yes'. Will there be compromise? You bet. The risk of compromise moving to the forefront gets bigger the bigger they win," said Koll, who nonetheless argues Abe is intent on meaningful reforms.

Abe will also face a tough decision in autumn on whether to give the go-ahead for a plan to raise the 5 percent sales tax to 8 percent next year, the first stage in a scheduled doubling by October 2015 to help curb Japan's huge public debt.

Some LDP members fear a tax hike would derail a recovery, but postponing it could cause havoc in financial markets, where the move would be taken as a signal of reneging on fiscal reform.

The International Monetary Fund (IMF), while giving a cautious OK to "Abenomics", has warned of downside risks if Japan doesn't both cut its debt - already twice the size of its $5 trillion economy - and enact structural reforms.

Concerns have eased a bit that the deeply conservative Abe might shift attention after the election from the economy to pet projects such as revising the pacifist constitution, drafted by U.S. Occupation officials after Japan's defeat in World War Two.

The LDP's junior partner, the New Komeito, is wary of such changes and media forecasts suggest the LDP and small parties that also favor constitutional revision will fall short of the two-thirds majority needed to submit changes to a plebiscite.

But Abe may find his Achilles' heel in questions relating to Japan's wartime history, which he wants to recast with a less apologetic tone.

Abe visited Tokyo's Yasukuni Shrine, where wartime leaders convicted as war criminals by an Allied tribunal are honored with war dead, after becoming LDP leader in September.

He has declined to say if he will do so as premier, but could face pressure from supporters to go on the August 15 anniversary of Japan's defeat or at an annual autumn festival.

A pilgrimage to Yasukuni would outrage China and South Korea, which suffered from Tokyo's wartime aggression. Tokyo's relations with Beijing are already strained by rows over rival claims to tiny, uninhabited isles. Abe may also have trouble refraining from comments on history that spark ire in Beijing and Seoul, in turn upsetting security ally Washington and potentially undermining his support at home.

"It is going to be very tempting for Abe to speak his mind that seems like an endorsement of what he stands for as a politician," said Sophia University professor Koichi Nakano.

(Editing by Neil Fullick)

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