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Japan turns to "Suganomics" – however analysts say the coverage is more likely to proceed Abe's legacy

Yoshihide Suga speaks during a press conference following his confirmation as Prime Minister of Japan on September 16, 2020 in Tokyo, Japan.

Carl Court | Anadolu Agency | Getty Images

Japan's new Prime Minister Yoshihide Suga is likely to pull out all the stops to revitalize the economy hit hard by the coronavirus pandemic, but will continue to carry out the policies of outgoing leader Shinzo Abe, analysts said.

Suga was officially elected prime minister by the lower house of parliament on Wednesday and took the helm as Japan's first new leader in eight years.

Abe, who resigned in August for health reasons, is best known for his economic policies collectively known as "Abenomics". The tripartite approach aims to fight deflation and revitalize economic growth with loose money and budget spending, as well as structural reforms to cope with a rapidly aging population.

Suga's new cabinet rollout demonstrated his desire to maintain stability and continuity as he kept many ministers in place while selecting new ones from various factions in his Liberal Democratic Party, noted Scott Seaman, Asia director at Eurasia Group, in a report .

"However, Suga's focus on pulling out all the stops to support a recovery makes it likely that he will provide fresh impetus by continuing to use reserve funds for contingency expenses, approving another additional budget later this year or early next year, and created a robust regular budget for fiscal 2021, "Seaman said in a note on Wednesday.

Promise to protect jobs

According to Fidelity's Katsumi Ishibashi, there are three main problems from a market perspective.

"Government economic policies, the promotion of structural reforms and deregulation, and the stability of the administration in support of these key initiatives are the top three concerns," Ishibashi, senior cross-asset analyst and portfolio manager at Fidelity International, said in a statement Thursday.

In his first press conference as prime minister on Wednesday, Suga said he would do his best to protect jobs while countering the coronavirus, Reuters reported.

Eurasia's sailor said Suga will likely do this through:

Dipped Japanese yen ($ 95.44 billion) 10 trillion in emergency funds from a second supplementary budget for fiscal 2020; Adoption of a third supplementary budget; andsetting a large regular budget for fiscal 2021 to support the economy.

"The budget for next year is likely to be big, and we can't rule out the possibility that Suga's administration may include novel measures like a year-long tax vacation for personal income taxes for lower-income households," Seaman said.

Expect changes, but Suga won't be far from Abenomics

However, Suga is unlikely to stray far from Abenomics' path, analysts said.

For one thing, he is unlikely to make any immediate changes to Bank of Japan's policies, even if politicians in Japan have a greater influence on monetary policy than in other advanced economies, said Tom Learmouth, Japanese economist with Capital Economics. But he will have the opportunity to reshape the central bank's policy board when two members are replaced next year, Learmouth said.

"One possible shift that could result is a greater willingness to cut interest rates: Mr Suga appears to be less concerned than current board members about the threat to financial stability from further rate cuts," Learmouth said in a report Tuesday " Unpacking Suganomics ".

Suga is also expected to accelerate reforms for the regional banking sector amid concerns about deteriorating profitability.

"The coronavirus crisis is exacerbating these concerns by driving up non-performing loans. As a result, we expect mergers between regional banks under Prime Minister Suga to gain momentum. This should help reduce the monetary policy threat to financial stability for longer Sight, "he said.

But when it comes to fiscal policy, the differences between Suga and Abe are "tiny," as Suga has pledged to keep politics loose until the economy recovers from the pandemic, Learmouth noted.

But Suga – who appears to be more of a supporter of immigration – could increase net annual migration, which would help offset some of the resistance of a shrinking working-age population. He may also be able to push through more aggressive minimum wage increases once the economy recovers from the pandemic – and with it, productivity increases, Learmouth wrote.

Regardless of the plans and changes, the new Japanese Prime Minister has a short term ahead of him as he faces another Liberal Democratic Party leadership competition in September 2021 – when Abe's original term was due to end.

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