Japanese land sale implications

On 12 March, Japan's Ministry of Finance admitted publicly that it had altered 14 documents pertaining to the sale of state-owned land to private school operator Moritomo Gakuen.

• Moritomo Gakuen bought the land in June 2016 at merely 14% of its appraisal value: deleted sections of the documents indicate that multiple politicians contacted the Ministry of Finance during its negotiations with Moritomo Gakuen.
• If the evidence and resulting public censure extend to Prime Minister Shinzō Abe and his wife's alleged involvement in the sale, this would substantially undermine his prospects for re-election as Liberal Democratic Party (LDP) party president in the September election, meaning that he would no longer be prime minister. Abe would be more likely to step down if Minister of Finance Tarō Asō were to resign.
• Although the budget bill for fiscal year (FY) 2018 will pass by 31 March, other key policies will probably be delayed or dropped altogether in 2018, specifically affecting constitutional amendment, an income tax bill, and "work-style" bills aimed at reforming the labour market.

In May 2015, the Japanese government and private school operator Moritomo Gakuen initially signed a 10-year lease for land in Toyonaka, Osaka Prefecture, for the school in question, because the company had insufficient funds at that time to complete a purchase. In June 2016, the government sold the land to Moritomo Gakuen at a discount after industrial waste was discovered at the site. The land was sold for JPY134 million (USD1.26 million), merely 14% of its appraisal value of JPY956 million; media and experts have challenged the official line that the JPY822-million reduction matched the cost of removing the waste, in part because the final sale price was close to that presented by a Kinki regional-branch Ministry of Finance (MoF) official before the waste was discovered.

In February 2017, when this was first reported and the MoF disclosed the price paid, the school's ultranationalist curriculum and the role of Prime Minister Shinzō Abe's wife, Akie Abe, an honorary principal, became subjects of widespread media criticism. As a result, in March 2017, Moritomo Gakuen withdrew its request for permission to open the "Tsukamoto Kindergarten" on the site. In addition, in February 2017, Akie Abe resigned as honorary principal and Shinzō Abe said that he would resign as the prime minister and a member of the Diet if evidence proved that he or his wife was "involved".

However, the scandal only temporarily undermined Shinzō Abe's support rating, mainly because until now, there had been no evidence of government wrongdoing. Now-released "settlement documents" ("kessai bunsho") show deleted sections that mention the following:

• An agreement to sell the land to Moritomo Gakuen as "an exceptional case" in the original lease
• Officials from the Kinki regional branch consulting with those in the MoF Tokyo office
• The names of the Finance Minister Tarō Asō, Shinzō Abe, and Akie Abe, including from a section explaining Moritomo Gakuen's connection to the "Nippon Kaigi" far-right group

On 9 March, the police confirmed that a Kinki-branch official was found dead in an apparent suicide (often considered an act of contrition in Japan), and National Tax Agency head Nobuhisa Sagawa resigned, taking responsibility for the alterations made by the MoF Financial Bureau between February 2017 and April 2017 while he was bureau-chief. In contrast, Asō reiterated on 13 March 2018 that he would not resign and instead plans to continue leading investigations into the matter.

Outlook and implications

Unless evidence emerges linking more senior bureaucrats and politicians to the documents' alteration, Asō is unlikely to resign. His departure would also almost certainly trigger calls for Shinzō Abe also to resign, with Japanese culture encouraging leaders to take responsibility for their direct appointees' actions. However, the revived scandal damages Shinzō Abe's prospects for the Liberal Democratic Party (LDP) presidential election in September. Probable replacements include Shigeru Ishiba, a relatively vocal challenger of Shinzō Abe. If Asō resigns and the Moritomo scandal becomes more closely linked to Shinzō Abe, the LDP is more likely to favour a relatively anonymous candidate, boosting the prospects of Fumio Kishida.

In addition, while investigations continue, opposition politicians will probably frustrate the ruling coalition's policy agenda. This was indicated last week when opposition lawmakers walked out of fiscal year (FY) 2018 budget negotiations. In Japan, budget bills are automatically enacted 30 days after submission to the upper house of the Diet; therefore, the budget will pass by 31 March. However, related legislation is at risk: notably, if an income tax bill does not pass before April, this will damage projected fiscal revenues for FY 2018. Therefore, although the scandal is unlikely to have immediate an downside effect on economic activities, this delay to bills with related tax amendments to secure financial resources and create tax incentives will probably increase fiscal shortfalls and delay reforms. The most notable reforms are those affecting the labour market, specifically focusing on "working-style" reforms, human resources development, and increasing productivity. For example, opposition lawmakers will probably obstruct working-style bills seeking to reduce the maximum number of permitted working hours and the substantial wage discrepancy between "regular" and "irregular" employees. Lastly, Diet debate on constitutional amendments planned for 2018 is now unlikely; LDP members indicated proposals would probably not be submitted by the 25 March party conference given the ongoing scandal.

If Shinzō Abe were to resign, it would also probably delay or block the nomination of Haruhiko Kuroda as the governor of the Bank of Japan (BoJ). The prime minister's eponymous "Abenomics" economic reform policies have required co-ordination by the government, the MoF, and the BoJ. As long as the government and the BoJ adhere to their 2012 accord to work towards a target of 2% inflation, any changes to the nomination of BoJ governor is highly unlikely to affect the BoJ's aggressive monetary easing. Nonetheless, it will probably perpetuate speculation that would increase volatility in the financial market and lead to yen appreciation. Specifically, some investors fear that fiscal and monetary policy may cease to work in lock-step, as in 1998 after then-prime minister Ryutaro Hashimoto stepped down after a scandal at that time.