Shinzo Abe, Japan's Longest-Serving Postwar Leader, Resigns As Health Deteriorates

Following repeated hospitalizations over the past few weeks stemming from a flareup of his chronic ulcerative colitis (which causes the PM to have explosive, difficult-to-control, bowel movements that must be controlled with medication), Japanese Prime and Liberal Democrat Party leader Minister Shinzo Abe officially resigned Friday morning, marking the end of his reign - the longest of any postwar leader in the world's third-largest economy.

Abe called a press conference early Friday morning and announced that he planned to step down as party leader and PM, though he will stay on in a caretaker capacity until a successor is chosen.

Japanese stocks plunged on the news, with the Nikkei 225 falling from 23310 to 22678 within minutes of the first headline, before bouncing off the lows. Abe has no clear successor, and his resignation is expected to set off a heated contest for the premiership at a time when Japan is struggling from the delayed 2020 Olympics and a coronavirus outbreak that refuses to fade.

Party Secretary General for the Upper House of the Diet Hiroshige Seko said that Abe had decided to resign so his health wouldn't "cause trouble." The PM, whose term officially ends in September 2021, is expected to stay on until a new party leader is elected and approved by Japan's parliament, the National Diet.

Abe famously and abruptly resigned from his first stint in office back in 2007 due to his health. But somehow, he made a political comeback years later and was reelected in 2012. Shortly after Abe's victory in 2012, we predicted that "diarrhea" might be one of the main stumbling blocks of his tenure. And while we perhaps underestimated Abe's staying power, it looks like, in the end, the prediction proved surprisingly prescient.

His resignation comes just days after he officially bested his great-uncle as Japan's longest serving prime minister. On Monday, Abe officially clinched the title of Japan's longest serving prime minister by consecutive days in office, besting the record of his uncle Eisaku Sato, who served 2,798 days from 1964 to 1972 as leader of Japan. Abe's family has been at the apex of Japanese politics since the postwar period began: his great-grandfather, Nobusuke Kishi, also served as PM.

Abe's decision to resign in 2007 set off a period in Japanese politics known as "the revolving door" as the country endured 7 leaders in a decade, including Abe himself, until Abe was reelected in 2012. Abe has struggled with the chronic condition since he was a teenager and has said the condition was controlled with treatment. However, after his recent hospital visits were reported, top officials from Abe's Cabinet and ruling party spoke out to say the PM badly needed time to rest.

He's leaving on a decidedly low note for his rule, with his approval ratings at their lowest levels ever due to his handling of the coronavirus pandemic, along with the embarrassing flight from justice engineered by Carlos Ghosn, along with a slew of political scandals that have plagued the ruling party.

Abe's political arch-rival Shigeru Ishiba, a 63-year-old hawkish former defense minister, is favored to be the next leader according to public polling, but he's less popular within the ruling party, where several other candidates - Yoshihide Suga (Chief Cabinet Secretary), Fumio Kishida (Policy Research Council Chair), Taro Aso (Deputy PM/Minister of Finance), and Shigeru Ishiba (former LDP Secretary-General) - are all seen as potential successors.

The PM's legacy will have major consequences for the world's third-largest economy, as the PM sought to combat a prolonged period of tepid growth with his "Abenomics" policy of ultra-loose monetary policy. Under his purview, the BoJ bought up government bonds and even Japanese equity ETFs at an alarming and unprecedented clip. But the "three arrows" of Abenomics - not only failed to stimulate inflation and boost exports via a weakened yen, but it has brought Japan's banks to the verge of disaster, despite a recent improvement in bank lending.  The BoJ has already said that there will likely be "no change" in its monetary policy course now that Abe is gone.

Abe's economic legacy is probably best represented by this chart.

At this point, policymakers’ focus is now more on keeping its banks on life support by paying them to boost lending, since Japanese banks can't make any money with interest rates at current levels. To be sure, the literal wall of money printed by the BOJ in recent years has kept a lid on bankruptcies and job losses.

But the country's prolonged battle with COVID-19 is only adding more strain to Japan's regional banks, which can no longer survive without more life support from the BoJ. With Japan's political leaders effectively boxed in by an "unfixable" economy, where structural changes like an aging population have effectively precluded a return to growth, it's no wonder Abe's ulcers are acting up. His decision to leave, which was expected, if not quite so soon, bears the unmistakable hint of surrender, an acknowledgment that Japan's problems are unfixable.

Many westerners who are unfamiliar with Japan's political system might find themselves wondering: what comes next? Fortunately, Goldman's research department has that covered.

With Abe staying on as caretaker, the LDP will soon elect a new president of the party. The new party leader is typically appointed Prime Minister, subject to being nominated in both the Upper House and the Lower House (the nominations in the Diet are a mere formality; whoever wins the party leadership contest will be the next PM).

Should the leadership process drag on too long, or should Abe's health deteriorate markedly,  \one of the deputy PMs could take his place (Deputy Prime Minister/Finance Minister Taro Aso is first in line), but Abe said he would instead remain in his position until a new party leader is confirmed.

As far as the party leadership process goes, that's a little more complicated. As Goldman explains, there are two possible routes this whole thing could take.

There are two possible processes for electing a new LDP president, and the LDP will reportedly decide the process on September 1 (August 28 Nikkei). In the usual process, the new president is selected via an LDP leadership election (voting by Diet members and regional members, with each group having 396 votes). However, given the sudden resignation of the president and in order to avoid a vacuum period of power, the LDP may choose to hold a vote at the Party's Joint Plenary Meeting (with LDP Diet members having 396 votes and regional members 141). If this turns out to be the case, candidates who are popular in the regions would be at a disadvantage, as regional members would have fewer votes.

Whoever wins will serve out the remainder of Abe's term (with only one year left, they would soon find themselves in campaign mode) as party leader, meaning there could be a rematch of the party leadership contest exactly one year from now. Last time Abe stepped down, a successor was chosen within two weeks.

Goldman believes Abe has every incentive to ensure a smooth transition. Several candidates have been discussed in the media as potential successors, and their names are mentioned above. Whoever wins, Japan's aggressive monetary and fiscal policy mix will likely be continued by Abe's successor. But given the current COVID-19 crisis, Japan's next PM will immediately face a serious health and economic crisis.