Japan Markets Roiled As Moritomo Scandal Returns, Abe May Be Forced To Resign

It was exactly one year ago that the previously unshakeable administration of Japanese Prime Minister Shinzo Abe was rocked by a crisis which prompted some to ask if Abe's government was on the rocks, and with it - Abenomics: the crisis was not one of bungled economic policies, party in-fighting or any of the other calamities that have brought down Japanese leaders in the past, including Abe's first administration as prime minister. No, Abe was struggling to shake off a scandal involving a kindergarten.

As we reported last March, Abe had been riding high in the polls and making plans to run for an unprecedented third term as head of the dominant Liberal Democratic Party, when questions first began to be asked about Moritomo Gakuen, a kindergarten operator in Osaka with what was initially described as a conservative curriculum, prompting  the prime minister to declare that he shared many of the philosophies of the school’s president, Yasunori Kagoike.

It would emerge in swift succession that the premier’s wife, Akie Abe, had been named honorary principal of a new school being planned by Kagoike; that the school was being built on land purchased from the government by Moritomo Gakuen for a fraction of its estimated value; that Abe’s wife Akie allegedly donated 1 million yen to the foundation in September 2015 on behalf of her husband, and that the operator’s philosophies imposed upon his young pupils were not just conservative, but tended towards far-right pre-war nationalism. 

The scandal raged for several months, resulting in Abe's approval rate tumbling, however at the last possible moment, Kim John Un's ICBM launches successfully distracted the Japanese population, and Abe's militant response was sufficient for the public to forgive and forget the entire Moritomo incident.

Until now...  because as the Japanese press reported over the weekend, the Moritomo scandal involving PM Abe's connections with the operators of the right-leaning school implicated in fraud are again roiling markets in Japan.

As NHK reports, while Abe is not the focus of the current investigation and his position remains secure for now, fresh allegations that tax authorities involved may have even fabricated reports in favor of Moritomo could force the resignation of Deputy PM and Finance Minister Aso as the National Tax Bureau reports directly to him.

Specifically, Japan's Finance Ministry will admit to the Diet on Monday that alterations were made to documents on the controversial state land deal. As we reported a yea ago, the land in Osaka Prefecture was sold to private school operator Morimoto Gakuen in 2016 for only a fraction of its market value. The transaction sparked allegations of favoritism in part because the wife of Prime Minister Shinzo Abe was acquainted with the school operator.

After the scandal came to light last year, the Finance Ministry submitted to the Diet settlement documents for the deal. But, earlier this month, a newspaper alleged that the papers had been altered before being submitted to the Diet. The ministry has since questioned its employees involved in the matter and concluded that changes were made to some wording in the documents.

In reaction to the Morimoto scandal coming back from the dead, six of Japan's opposition parties will demand Finance Minister Taro Aso step down to take responsibility for the matter, NHK reports. They also plan to demand the government release all related documents and that Nobuhisa Sagawa, who resigned last week as head of the National Tax Agency, be summoned to give testimony at the Diet. He was the ministry's Financial Bureau chief when the land deal was made.

Meanwhile, the ruling parties are urging the opposition parties, which have been boycotting Diet sessions since last week, to make facts clear through the debate in the Diet.

Meanwhile, analysts have already warned that a resignation by Aso would take the legs out of the current Abe administration, perhaps even forcing the PM to eventually resign as well, and forcing changes at the BOJ.

Furthermore, hitting much closer to home, Kyodo reported that Abe’s wife Akie was among names deleted from altered Finance Ministry documents pertaining to the sale of public land to Moritomo, putting Abe himself in jeopardy.

And one look at Japanese markets shows that investors are starting to get spooked with the USDJPY suddenly sliding taking a hit from concern that deepening of a scandal over alleged favors to a school with connections to Japanese Prime Minister Shinzo Abe may prompt a retreat of Abenomics, said David Lu, director at NBC Financial Markets Asia in Hong Kong...

... while Japanese stocks are paring some of their strong early gains; while the implications of any Aso resignation are hard to fathom at this point, many believe the Nikkei would plunge, and risk-off sentiment could return fast, sending the JPY higher once again.

This, according to Reuters, would be especially the case now, with investors already nervous over possible trade wars and recent stock market volatility.