Allianz GI: Japanese Election - More of the same

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A decisive result in the Lower House elections strengthens Japanese Prime Minister Shinzo Abe’s hand and implies the continuation of Abenomics. The government’s accommodative monetary stance is set to continue, while political expediency suggests that fiscal policy will now also take a more accommodative approach.

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 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 JGB purchases. The bank has already reduced its annual pace of JGB purchases from JPY80 trillion to around JPY50 trillion, while maintaining the so-called around JPY80 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 VAT 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 hiking 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.

Neil Dwane, global strategist at Allianz Global Investors

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