RaboResearch - Economic Research

Japanese snap elections: logic or gamble?

Economic Report

  • Japanese premier Shinzo Abe called on September 22 for snap lower house elections to be held on October 22 - mainly on the back of recent improvements in Abe’s approval ratings after the low July levels
  • Despite these ratings, a disorganized and expected weak opposition would additionally benefit Abe’s LDP-Komeito coalition
  • Although we still expect Abe’s coalition to win the election by majority, the disbanding of Japan’s largest opposition party and the subsequent founding of Yuriko Koike’s new Party of Hope can turn the snap election from initial logic to a gamble

Why elections now?

Officially, Japanese elections should be held before end-2018 in Japan. As such, the 22 October snap elections, announced by Prime Minister Abe, are scheduled more than one year earlier than is required. But in Japan, prime ministers have the power to call for (earlier) elections. Why has Abe opted for this? His official reading is that he wants to get the public’s support for a new set of tax and social welfare policies. But unofficial readings clearly point to other factors:

  1. Abe wants to redeem improved approval ratings;
  2. Abe’s cabinet reshuffle in August;
  3. Cementing Japan’s firm stance towards North Korea;
  4. The favourable economic momentum, and
  5. The opposition appears weak and disorganized

Let’s look at these factors in more detail.

Improved approval ratings

Figure 1: Approval > Disapproval ratings
Figure 1: Approval > Disapproval ratingsSource: NHK, Macrobond

Abe wants to redeem his improved cabinet approval ratings, making his Liberal Democratic Party (LDP) the biggest. This would give him better chances to maintain his position as prime minister beyond 2018. In July, approval ratings nosedived after he and his party were accused of two scandals which were seen as contributing to the huge LDP loss in the July 2nd metropolitan elections in Tokyo. Since then, approval ratings have been on an increasing path and the most recent ones even show that approval has exceeded non-approval (figure 1).

The August cabinet reshuffle

After the fall in approval ratings and the major defeat in the Tokyo elections on 2 July, Abe decided to reshuffle his cabinet by replacing some ministers. This was explained as a move to enhance stability (e.g. no more scandals). After the reshuffle, the cabinet’s approval ratings edged up from 35 in July to 39 in August (figure 1). In his view, early elections would consolidate this decision – leading to a possible extension of his current cabinet.

Stance towards North Korea

Tensions related to the North-Korean conflict are said to have boosted Abe’s reputation by signalling a tough(er) stance on foreign affairs and security issues. During his speech at the UN General Assembly on September 20, Abe referred to North Korea and regarded that “the gravity of this threat is unprecedented. It is indisputably a matter of urgency”. This speech and his discussions with allies like the US and South Korea have helped to bolster his image as a firm defender of Japanese national security and interests. An (early) election victory would further strengthen Abe’s position on this matter.

Favourable economic momentum

The PM and his cabinet additionally benefit from the tailwind of six consecutive quarters of economic growth and historically low unemployment levels. Although Japan’s Q2 GDP growth rate was cut by 0.4ppt to 0.6% q/q –mainly resulting from business investments which had been much weaker than previously thought, it still was the highest quarterly growth rate of all the six quarters (figure 2). Meanwhile, the unemployment rate stands at a 23-year low of 2.8% and the jobs-to-applicants ratio at 1.52, its highest level since 1974 – both signalling ongoing tightness in the labour market (figure 3). Abe may see this as a good opportunity to claim success of his economic policies.

Figure 2: Strong economic performance
Figure 2: Strong economic performanceSource: Japanese Cabinet Office, Macrobond
Figure 3: Ongoing labour market tightness
Figure 3: Ongoing labour market tightnessSource: Japanese Ministry of Health, Labour and Welfare, Macrobond

Weak and disorganized opposition?

One final argument – and this is the greatest gamble going forward – is the view that the current opposition would not be a threat to a successful election result. But almost at the same time that Abe dissolved the Japanese Diet, Tokyo governor Yuriko Koike announced the creation of a new party – the Party of Hope. Recall that Koike defeated Abe’s LDP party in the recent Tokyo metropolitan elections. And Japan’s largest opposition party, the Democratic Party (DP), even disbanded to merge (partly) with Koike’s new Party of Hope on 28 September. As such, there is chance that these developments will not weaken, but rather help to energise the weak political opposition ahead of the elections. The only question is whether they will have enough time to organize and profile themselves as proper contenders. This is of course another reason why Abe called these snap elections, instead of waiting for the official date.

Markets seemingly don’t care a lot

Figure 4: Only Nikkei reacts to mid-September announcement
Figure 4: Only Nikkei reacts to mid-September announcementSource: Macrobond

There was some reaction on Japanese markets right after the election announcement. When rumours sparked on September 17, the Japanese stock exchange was closed the day after because of the Japanese national holiday ‘Respect for the Aged Day’. On September 19, the Nikkei index closed 1.9% higher – followed by a more tepid reaction in the days after the announcement (figure 4).

For the yen, a different story holds. The ability of the yen to react to domestic news has been stifled by its role as an international safe haven currency. As such, yen movements have been irrespective of the news referring to Abe’s call for snap elections. The yen continues to be led not by domestic news but by the trade-off between safe haven demand and the carry trade. But this arguably fits into the broader observation that financial markets are remarkably sanguine with respect to almost anything at the moment.

What are the odds?

As a result of changes on the opposition side, the election suddenly seems to be less predictable compared to Sunday the 18th of September – the date that rumours were confirmed that Abe would call a snap election. Abe’s LDP-Komeito coalition currently holds 68% of the seats in the House of Representatives (Lower House), which corresponds to 323 of total 475 seats (figure 5). It is unlikely that the coalition will lose its majority, but Abe’s LDP would like to maintain its supermajority (66.7% of total seats), so that it can make constitutional changes. We must add, though, that the LDP did not make use of its supermajority previously. Even if the ruling coalition would only retain a simple majority, Abe admitted that he would regard such an outcome as a success – signalling expectations that campaigning would not be plain-sailing.

Figure 5: Abe’s LDP-Komeito coalition holds super-majority
Figure 5: Abe’s LDP-Komeito coalition holds super-majoritySource: Japanese Cabinet Office

A recent poll conducted by news agency Kyodo even showed that 43% of respondents are undecided whom to vote for. One interesting point to make here is that Koike has repeatedly argued that she will not be running for a Diet seat herself – mainly because she wants to stay in office as governor of Tokyo. Furthermore, not all disbanded DP politicians opt for a Party of Hope seat – which is illustrated by the founding of another party, namely the Constitutional Democratic Party of Japan of former DP politician Yukio Edano. All in all, if this newly formed opposition is able to set up a well-organized election campaign throughout the country -same as Abe’s LDP is expected to do- chances are real that the current coalition would lose their super-majority. But taking into account the short amount of time left ahead of the election, this seems yet unfeasible. One thing we can conclude for sure is that Abe would have expected a far less ‘wild-card’ opposition when announcing snap elections. As such, this is slightly more of a gamble than sheer calculus.

Say Abe wins, then what?

So Abe’s coalition will face a reorganized opposition for the upcoming elections of which relatively little is currently known about their plans. Given that our base case is that Abe’s coalition will hold a Lower House majority after the elections, it is more interesting to regard whether they can hold their super-majority. Abe has 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.

As indicated in the introduction, Abe officially stated that he announced the early elections because he wants to seek support for a $18bn stimulus package on education and social welfare – which corresponds with the estimated revenue from the planned increase in consumption tax from 8 to 10% by October 2019.
Initially, the benefits of this tax increase would be used to reduce the government’s debt burden, but Abe is now proposing to allocate it differently. 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. Next to electoral pledges, Abe’s victory would imply a continuation of Abenomics, implying flexible fiscal spending, structural reforms and monetary easing, although the latter is more depending on Bank of Japan’s policy changes. But picking the new BoJ governor in early 2018 might be easier when in a stable position.

But what if he loses?

In general one can say that it is not always the best choice to hold elections because of favourable developments in approval ratings. A well-known recent example is related to British Prime Minister Theresa May, who held early elections for a stronger mandate during the Brexit negotiations, but then lost the majority in the British House of Commons her party had until then. Based on current polls, Abe is still heading for a win, but it’s simply too early to cheer for him, especially when one takes into account looming power stemming from the new opposition, but we regard an outright defeat as highly unlikely. As we highlighted above, financial markets have generally proved sanguine in the face of political risks, but should Abe have ‘Theresa May experience’, one cannot rule out a more significant market reaction.

Björn Giesbergen
RaboResearch Global Economics & Markets Rabobank KEO

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