Prime Minister Shinzo Abe will drastically shift the direction Japan takes in monetary and fiscal affairs, and will likely overturn a pledge by the outgoing administration to pull the plug on nuclear power.
In addition, Abe is expected to strengthen Japan's alliance with the United States and try to repair ties with China.
The government of the Democratic Party of Japan declared it would shut down all nuclear reactors by the 2030s. Abe condemned the policy as "irresponsible."
There is now a strong possibility of Japan retaining nuclear power, and Abe has additionally indicated a readiness to allow nuclear reactors halted last year to fire up again. The widespread shutdown was one response to the accident at the Fukushima No. 1 nuclear power plant following last year's Great East Japan Earthquake and tsunami.
"Once the Nuclear Regulation Authority creates stricter rules, we will decide over a period of three years whether operations can resume," Abe said at a news conference late on Dec. 26, the day he formally established his Cabinet.
He added, "We will also have to consider how we are to meet demand for electricity in the short term. There is the danger of a further hollowing out of the domestic manufacturing sector."
The Nuclear Regulation Authority is not expected to compile new safety standards until after July 2013, which means any decision on resuming operations could likely only be made after the Upper House election in the summer.
During negotiations with coalition partner New Komeito, the LDP overruled New Komeito's demand that Japan go nuclear-free. And the wording in the coalition agreement was toned down to state the aim of reducing "dependence on nuclear energy as much as possible."
This lack of a specific target could allow Japan to maintain its dependence on nuclear energy indefinitely.
But a more symbolic issue concerns whether the new government will approve the construction of new reactors.
During his first news conference Dec. 27, incoming economy minister Toshimitsu Motegi said it would take "a major political decision" on whether or not to allow construction of nine reactors that currently exist only at the planning stage.
"We will not immediately be declaring 'yes or no,' but we will collect experts' opinions in order to make a major political decision in the future," he told reporters.
The DPJ government decided to withhold permission for construction of the nine units. Among them is the Kaminoseki plant in Yamaguchi Prefecture planned by Chugoku Electric Power Co.
However, Abe indicated at a Dec. 21 news conference that he would leave the question of new construction undecided for now.
Meanwhile, personnel appointments point to a greater say in policy by senior former civil servants who in the past walked in step with the LDP in promoting nuclear energy.
One of Abe's new aides is Takaya Imai, a former deputy director-general of the Agency for Natural Resources and Energy. Imai served as an administrative aide during Abe's first stint as prime minister.
Named as an administrative aide this time is Tadao Yanase, deputy director-general of the Economic and Industrial Policy Bureau at the Ministry of Economy, Trade and Industry.
Both Imai and Yanase were involved in nuclear policy when they worked at METI.
In foreign policy, the priority will be to relieve tensions over the Senkaku Islands territorial dispute in the East China Sea.
Ever since the central government put three of the islands in state ownership, ships and planes from Chinese government agencies have been approaching and on occasion violating Japanese territorial waters and airspace.
The diplomatic atmosphere has turned so icy that Japanese and Chinese leaders have been unable even to approach each other for informal chats when attending international conferences.
On Dec. 22, Abe told reporters that he wanted to try to return to the starting point of a "mutually beneficial relationship based on common strategic interests."
That was the phrase Abe used during his first stint as prime minister in seeking a relationship with China that stressed mutual benefits such as trade.
However, before work can begin on improving ties, Beijing will be carefully watching whether Abe visits the Yasukuni Shrine in Tokyo, which memorializes Japan's war dead along with 14 Class-A war criminals.
Frequent visits to the shrine by former Prime Minister Junichiro Koizumi led to a worsening of bilateral relations ahead of Abe's first stint as prime minister six years ago. For that reason, Abe himself refrained from setting foot there while in office.
Moreover, Japan has no leeway to concede territorial sovereignty over the Senkakus. Therefore, the issue will likely be drawn out.
At his Dec. 26 news conference, Abe described the Senkakus issue as "a clear and present danger."
In order to avoid a military confrontation, strengthening alliance ties with the United States will be essential.
Abe aims to visit the United States in late January. In a Dec. 18 phone call with U.S. President Barack Obama, Abe said he wanted to discuss ways to strengthen their alliance. Among the steps he is considering is allowing Japanese self-defense forces to exercise the right of international collective self-defense.
A key issue for improving ties with Washington will be whether Japan decides to participate in negotiations for the Trans-Pacific Partnership free trade arrangement, which the United States has pushed for years.
While the coalition agreement with New Komeito left open the possibility of Japan's participation in TPP talks, some LDP lawmakers urge a standoffish approach in order to keep the agricultural lobby on their side. Farming groups are important supporters of the LDP, and their support will be counted on for the Upper House election in the summer.
Abe has already taken some steps to repair relations with South Korea.
After Park Geun-hye won the presidential election there last week, Abe issued a statement in which he described Japan and South Korea as "neighbors for whom close cooperation is indispensable."
Outgoing South Korean President Lee Myung-bak triggered outrage in Tokyo when he visited the Takeshima islets this year. Abe has decided to adopt a soft approach for now, foregoing Feb. 22 plans to have the central government mark "Takeshima Day," a name coined by the Shimane prefectural government, under whose administrative authority Japan considers the islands to lie.
However, as far as South Korea is concerned, one issue may remain unresolved. This involves Japan's position over the question of so-called comfort women, individuals forced to provide sex for Japanese soldiers during the wartime era.
Lee cited Japanese inaction on this as why he decided to visit Takeshima.
"The mission of my administration will be to restore a strong economy," Abe said at his Dec. 26 news conference.
The government's main tools for this are monetary and fiscal policy.
Abe has already pressed the Bank of Japan to shift course. On Dec. 18, he met with BOJ Governor Masaaki Shirakawa and asked that the central bank increase its targeted inflation rate to 2 percent. Furthermore, he asked it to sign a policy accord with the central government.
At its Policy Board meeting on Dec. 19-20, the BOJ decided on additional monetary easing of 10 trillion yen ($117 billion) and began considering setting an inflation rate target.
On Dec. 23, Abe responded, saying if the BOJ Policy Board failed to agree to sign a policy accord at its next meeting on Jan. 21-22, his government would seek to revise the BOJ Law in order to be able to force it to adopt a targeted inflation rate.
This is seen as coercing the BOJ into agreeing to a policy accord and forcing it to implement further monetary easing to reach the inflation rate target. Those measures are expected to include flooding the market with funds, which would drive down interest rates and weaken the yen.
In addition, the Abe administration is set to expand public-works spending in line with a campaign pledge to strengthen social infrastructure. Such spending would not only help disaster recovery efforts but also, the government hopes, stimulate the economy.
The LDP has pledged to spend 200 trillion yen over 10 years. As a first step, the Abe Cabinet is expected in January to decide on a supplementary budget of about 10 trillion yen.
The government has issued 44 trillion yen in bonds to pay for part of the current fiscal year's 90 trillion yen budget. At his first news conference, Finance Minister Taro Aso said Abe had instructed him to widen the amount of government bond issuance beyond the 44 trillion yen figure.
Aso also said he wanted the fiscal 2013 budget to include goals for strengthening the nation's fiscal health. However, its condition may only worsen if the government takes out more debt to pay for greater public spending.
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