RIETI Report June 2013

Political Stability and Corporate Behavior

In the House of Councillors election on July 21, the ruling coalition of the Liberal Democratic Party (LDP) and New Komeito won 76 seats, securing the majority in the upper chamber of the Diet, and putting an end to the divided Diet for the first time in the three years. In addition to a positive appreciation of Abenomics, expectations calling for political stability are believed to be reflected in the ballot outcome, and of particular importance is the likely continuation of the ruling coalition's dominance in both chambers for the next three years. In the July issue of the RIETI Report, we present Vice President Masayuki Morikawa's column "Political Stability and Corporate Behavior."

Morikawa discusses how policy uncertainty is linked to corporate behavior, wherein even if the government has chosen the right policy, long-term business investment will not actualize if corporate managers feel that the policy will be changed shortly. He also presents results from an original survey of Japanese publicly listed companies to find out the specific policies over which corporate managers feel uncertainty, the impacts they believe such uncertainty has on their management decisions, the types of management decisions that are strongly affected by uncertainty, and other factors. Will the end to the divided Diet mean less uncertainty regarding the future economic policies? Morikawa hopes that greater political stability will lead to the improved performance of the Japanese economy, putting an end to the prolonged stagnation.

This month's featured article

Political Stability and Corporate Behavior

MORIKAWA MasayukiVise President, RIETI

In the House of Councillors election on July 21, the ruling coalition of the Liberal Democratic Party (LDP) and New Komeito won 76 seats, securing the majority in the upper chamber of the Diet. This put an end to the divided Diet for the first time in the three years since the previous House of Councillors election in 2010. In addition to a positive appreciation of "Abenomics," a set of economic policies of the government of Prime Minister Shinzo Abe, expectations calling for political stability are believed to be reflected in the outcome of the latest election. What is particularly important is that the ruling coalition's dominance in both chambers will likely continue for the next three years.

When the two chambers of the parliament are controlled by different parties or when the opposition controls the legislature under the presidential system, decision making on important policies is bound to be stalled or postponed, whether it is in Japan, the United States, or any European country. As I wrote in my previous article for this column, a series of empirical studies have shown that political instability and frequent change of government have a negative impact on the national economy. According to these studies, the economic impact of political stability is quantitatively massive, far exceeding those of major growth policies such as trade liberalization and corporate income tax cuts. Thus, there is a good possibility that the outcome of the House of Councillors election per se will serve as a significant driver of economic expansion and growth.

To read the full text
http://www.rieti.go.jp/en/columns/a01_0375.html

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