Special Topics

Abe Consolidates Power After Landslide Victory, Sustaining Monetary Policy Divergence

Typography

Once again securing a super majority (two-third of seats) in the snap election on October 22, Japan's LDP/ Komeito coalition would continue to lead the lower house, possibly until 2021. The landslide victory indicates that PM Shinzo Abe would likely be re-elected for a third presidential term in the LDP next year, allowing him to push forward his political and economic policies with a stronger mandate. There are several reasons for the rally in Nikkei and USDJPY after the election outcome. Just like the previous elections we have seen before, the stock market and currency of a country usually weaken amidst of political uncertainty. Re-election of the ruling party has removed of uncertainty at least in the near-term. This bodes well for the stock market and currency. Unlike other currencies which tend to rise on lessened uncertainty, Japanese yen fell on diminished demand for safe-haven asset. Another reason for the rise in Japanese stock market and yen was expectations of lengthy monetary easing by BOJ. Meanwhile, widening US-Japan yield spread would also continue to support USDJPY in the medium term.

Japan's Lower House Election Result

LDP won 284 seats at the snap election. Together with Komeito's 29 seats, the LDP/ Komeito coalition has secured the supermajority (2/3 of 465 seats) in the lower house. The popularities of LDP and Abe have been decreasing before the election. However, the miscalculations made by Yuriko Koike, the leader of the Party of Hopes have led to Abe's victory. Apart from the limited time for running an election campaign given the Party of Hopes was only formed a few weeks before the election day, Koike's decision to not running for the election as the party leader is a mistake. Her rejection to ally with the Democratic Party, the former largest opposition which was dissolved before the election, led to the formation of a Constitutional Democratic Party. This has not only affecter her popularity but also resulted in a split of votes amongst the oppositions. Indeed, we can see that the opposition landscape has been reshuffled, with the Constitutional Democratic Party and the Party of Hopes being the two largest parties.

Fiscal Policy

There would not be much difference in the fiscal and monetary policies before and after the election. Abe would push forward his consumption tax hike in October 2019, to 10% from the current 8%. He has pledged to allocate 2 trillion yen (out of 5 trillion yen) of the increased tax revenue to expand access to education and cut waiting times at child-care centers. A detailed plan of the package would be released before the end of the year. He also pledged to create an investment program designed to enhance productivity. The most controversial part of the budget should be the defence spending. We expect a significant increase in military spending in response to the North Korean threat.

Monetary Policy

The monetary policy would continue to be ultra- accommodative. The 2% inflation target, which was set when BOJ governor Haruhiko Kuroda took office in 2013, should remain intact. Although there is a long way to go to achieving this target, Abe noted in a Nikkei interview last month that he would stick with this target. We expect the aim was to send the market a signal that the monetary policy would remain loose for a long period of time. Meanwhile, at the BOJ press conference in September, Kuroda rejected the idea of adjusting the inflation target. He affirmed that the inflation target is based on a joint agreement between the BOJ and the government made in 2013. He added that the target is consistent with the Bank of Japan Act, which endorsed the BOJ's main objective of achieving price stability. Kuroda pledged to implement more easing in order to achieve the target.

The election result has cleared of uncertainty of Kuroda's successor as his term ends in April 2018. Indeed, we expect Abe would likely appoint him for another term. In any case, Abe would be appointing a candidate who is dovish, willing to adopt monetary easing policy and keep the 2% inflation target.

USDJPY, EURJPY

At the September press conference, Kuroda suggested the price situation between Japan and the US (and Europe) is very different, although all are staging economic recovery. He noted that inflation expectations in Japan had never anchored at around 2%. Meanwhile, he feels comfortable with the divergence of the monetary policies between BOJ and the Fed (and ECB). We believe US/Japan yield differential, as a result of policy divergence, would sustain yen's weakness against US dollar and the euro.