Japan Election: Expect More of the Same

2017/10/23
Japan Election

Summary

A decisive result in Japan’s Lower House elections strengthens Prime Minister Shinzo Abe’s hand and implies the continuation of Abenomics. We expect the government’s accommodative monetary stance to continue and fiscal policy to also become more accommodative due to political expediency.

Key takeaways

  • This decisive result is likely to strengthen Prime Minister Shinzo Abe’s hand and implies the continuation of Abenomics
  • With inflationary pressures weighed down by structurally low wage growth, Japan’s easy monetary policy is set to continue
  • Japan’s government will likely shift to a more accommodative fiscal stance to counteract the rise in populist politics
  • Wider yield differentials globally could curb short-term appreciation in the yen and further support Japanese equities

As expected, the snap election for the Lower House of the Japanese Parliament on 22 October resulted in a two-thirds majority for the ruling coalition of the Liberal Democratic Party (LDP), led by Prime Minister Shinzo Abe, and the Komeito Party (KP).

This decisive result is likely to strengthen Mr Abe’s hand and implies the continuation of Abenomics – his hallmark economic policies designed to jumpstart the stagnant Japanese economy.

Tokyo’s metropolitan assembly elections in July, where the LDP scored its worst-ever results, had signalled trouble for Mr Abe. But these latest results suggest he could be back on track to win a third term as LDP president in September 2018.

Monetary policy will stay expansionary

The Lower House election results are unlikely to have any significant impact on the Bank of Japan’s (BoJ) monetary policy. The bank is likely to maintain for an extended period its accommodative monetary policy – via a framework of quantitative and qualitative monetary easing with yield curve control (YCC) – as inflationary pressures are likely to be weighed down by structurally low wage growth.

The current YCC framework is relatively flexible and has substantially increased the sustainability of the BoJ’s Japanese government bond (JGB) purchases. The bank has already reduced its annual pace of JGB purchases from 80 trillion Japanese yen (JPY) to around JPY 50 trillion, while maintaining the so-called “around JPY 80 trillion” language in its policy statement.

Fiscal policy to turn more accommodative

When it comes to fiscal policy, the government will likely shift to a more accommodative stance to counteract the recent negative sentiment that has led to a rise in populist politics. Combined with the pick-up in business activity, this should underpin the domestic recovery and strengthen the effect of the BoJ’s current easing policies.

The government may, however, struggle with its goal of achieving a surplus in the primary balance by fiscal year 2020. Given the political backdrop, any revenues from the planned hike in consumption tax (scheduled for October 2019) are likely to be used to enhance social security and education programmes – rather than to reduce the fiscal deficit. And a planned value-added tax hike in July 2019 could be postponed for a third time in a row, given the Upper House election immediately before.

Investment Implications

For markets, JGB yields are likely to remain low or hover around 0 per cent on the back of the BoJ’s continued YCC. The Japanese yen could be vulnerable only in the event of an external shock, such as a further escalation of the tension between the US and its allies and North Korea.

However, as central banks globally begin reducing their balance sheets, along with renewed expectations for continued rate hikes by the US Federal Reserve, a widening of yield differentials could curb any short-term appreciation in the yen and further support Japanese equities in general.

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Fed Fine-Tunes Rates as Trump Remakes Fed

2017/10/27
Federal Reserve Eagle

Summary

There is a high probability that the FOMC will hike rates at its December meeting, and a similarly strong chance that it will raise rates more in 2018 than the market anticipates. But for now, the markets seem more focused on whom President Trump will appoint as the next chair and vice chair.