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Japan: Abe’s election ‘gamble’ turned into victory

Economic Comment

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  • As expected, Abe and his LDP-Komeito coalition were victorious at yesterday’s lower house elections in Japan
  • Early results show that his coalition got more than 310 of total 465 seats. Voter turnout was around 54%, the second lowest since World War II – probably related to Typhoon Lan
  • Abe’s re-election has resulted in gains for the Nikkei (1.3%) this morning and losses for dollar/yen. This market reaction was to be expected

Surprise surprise? No.

Abe and his LDP-Komeito coalition were victorious at yesterday’s lower house elections. Early results show that his coalition got 313 of total 465 seats. Voter turnout was around 54%, the second lowest since World War II – probably related to Typhoon Lan. As we highlighted previously, Abe’s call for snap elections had some initial logic, but could turn into a gamble after several kinds of opposition party reshuffles took place immediately after Abe called for these elections. The largest opposition party, the Democratic Party, merged partly with the new Party of Hope (PoH), a new party created by Tokyo Governor Koike and the newly formed Constitutional Democratic Party.

The disappointing election result for the opposition side is not surprising when one takes into account the short amount of time for a structured election campaign, as well as Koike’s decision not to run as party leader (and potential PM) after raising the PoH by herself. But after last week’s polls, it could already be seen that the remaining question was not if Abe and his LDP-Komeito coalition would win, but by how much. In the end, Abe’s coalition even reached a supermajority, while Koike’s new party even ended third in terms of lower house seats. As such, only the opposition landscape has significantly changed (figures 1 and 2).

Figure 1: Lower house seats before…
Figure 1: Lower house seats before…Source: Japan Times, Rabobank 
Note: total lower house seats: 475
Figure 2: …and after the snap elections
Figure 2: …and after the snap electionsSource: Japan Times, Rabobank 
Note: total lower house seats: 465

By getting at least 67% of the seats in the lower house, Abe regained a supermajority which not only could bode well for a third presidential term after 2018, but it can also fulfil his longtime ambition of revising the pacifist constitution. If Abe fulfils his campaign pledges, a couple of things are to be expected going forward. The scheduled sales tax hike currently scheduled for October 2019 is expected to pass as Abe announced the early elections partly for seeking support for a $18bn stimulus package on education and social welfare. We would recall, though, that last time the consumption tax hike did not work out very well, but having this once again flagged in advance, one could see a victory by Abe as a mandate by the population.

He also indicated that he opts to amend the constitution for which he needs to achieve a long-wanted revision of the so-called post-war pacifist constitution to elucidate the role of Japanese military. With this revision he could further bolster Japans’ stance towards North Korea. Next to these pledges, Abe’s victory implies a continuation of Abenomics, implying flexible fiscal spending, (moderate) structural reforms and monetary easing, although the latter is more depending on Bank of Japan’s policy changes. But picking the new Bank of Japan (BoJ) governor in early 2018 might be easier after reaching a stable position as prime minister.

No surprise on financial markets either

Abe’s re-election has resulted in gains for the Nikkei (1.3%) this morning and losses for dollar yen; now slightly below 114 (figure 3). This market reaction was to be expected. Companies in the Nikkei will profit from the highly accommodative fiscal policies that Abe has been advocating since his first election and even more important, the highly accommodative monetary policies of the BoJ.

Figure 3: Nikkei higher and yen lower after election result
Figure 3: Nikkei higher and yen lower after election resultSource: Macrobond

Since Abe called for snap elections the Nikkei has risen by 7% on the expectation and confidence that the growth over fiscal consolidation policy will be continued. Regarding monetary policy Abe will continue to support the current accommodative policy of the BoJ. The current governor Haruhiko Kuroda, whose term will end in April next year, is very much in favor of this highly accommodative monetary policy. For this reason he will likely be offered a second term. This policy has –amongst others - led to a 20% depreciation of the yen. With a weaker yen, imports will become more expensive, which would hopefully raise domestic inflation.

The lack of inflation is an ongoing battle for the BoJ but increasing divergence of monetary policy between the BoJ on one side and the Fed and ECB on the other side, could lead to an even weaker yen. The Fed has already started to slowly and gradually wind down its balance sheet, whilst the ECB will likely announce its plans to gradually end quantitative easing during its interest rate decision on coming Thursday. The BoJ currently does not have any plans to end the highly accommodative monetary policy. Therefore, interest rate differentials are likely to increase. Looking at Japanese bonds we see that the interest rate on 10 year bonds has decreased with one basis point to 0.07% sending bonds higher.

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Author(s)
Björn Giesbergen
RaboResearch Global Economics & Markets Rabobank KEO
+31 (0)30 21 62562
Teeuwe Mevissen
Rabobank KEO

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