Markets

Schroders Quickview: Japan election result endorses Abenomics

Prime Minister Abe's comfortable election victory is a boost to his programme of reform.

16/12/2014

Andrew Rose

Andrew Rose

Fund Manager, Japanese Equities

30 Minutes
Unstructured Learning Time

CPD Accredited

Whilst a  huge win for the Liberal Democratic Party (LDP), the result of Japan’s election for the Lower House of the Diet was in line with opinion polls and essentially a confirmation of the status quo. The only significant changes were gains on the far left and losses on the far right, though neither grouping is large enough to have any meaningful impact on policy. 

 

In 2015 the focus will be on whether deflation is convincingly vanquished, and  the trend in real incomes will be an important indicator here.


There had been some speculation that the LDP might win an even greater landslide, with two thirds of the vote. In the event they did not, but do retain a two thirds majority together with their much smaller coalition partner, the Komeito. All other things being equal, this should remain the case until the latter half of 2018.

Given how little the political landscape has changed, it’s reasonable to ask what the point was of calling the election in the first place? Indeed, to judge by the record low turnout, many Japanese seem to be asking themselves that question. Ostensibly the election was called to get the public’s verdict on the postponement of the next consumption tax increase but in practice this was never really a point of contention. In reality the election was an act of political pragmatism; the campaign centred on whether two years of Abenomics has been a success or not. For the Japanese who voted, representing a little over half the electorate, the answer was in the affirmative.

The LDP’s election manifesto did not contain any eye-catchingly new policy initiatives. Accordingly, the short term focus of Abenomics is likely to be the implementation of previously discussed initiatives, such as an economic stimulus package, corporate tax cuts and trying to push ahead with nuclear restarts. Longer term, the extent to which Mr. Abe uses his renewed mandate to introduce economic reforms to raise the underlying rate of growth, will be an area of focus.

The fall in the market of around 3% during the two days immediately after the election, as well as the strengthening of the yen seems more to do with softer global markets than anything specific to the result. There may also have been an element of profit taking, following a period of positive Japanese macroeconomic news flows, which included additional monetary easing, a postponement of the consumption tax increase and lower oil prices. 

In 2015 the focus will be on whether deflation is convincingly vanquished, and  the trend in real incomes will be an important indicator here. Furthermore, there will be a great deal of interest in whether, at the micro level, moves toward better corporate governance and balance sheet efficiency are sustained.