By Luke Bartholomew, Investment Strategist, Aberdeen Solutions
The gamble has paid off for Japan’s prime minister Shinzo Abe, with his ruling coalition maintaining its two-third “super majority” in the snap lower house elections. It was a thumping victory for Mr Abe, and one that will surely see him be re-elected for a third term in his party’s presidential election in September 2018. Assuming he is reappointed, Abe will extend his administration to September 2021, becoming the longest serving Japanese leader of the modern era as he does.
Among the opposition parties, the (right leaning) Party of Hope lost seats, reflecting a sudden reversal of fortune for Tokyo Governor Yuriko Koike’s party. Conversely, the (left leaning) Constitutional Democratic Party of Japan sharply increased its seats to emerge as the leading opposition party. The comfortable win will be interpreted by both Mr Abe and investors as a mandate for a continuation of his economic strategy. The fresh stamp of approval from voters has been welcomed by investors both at home and further afield, with Japanese shares hitting fresh highs and world stocks receiving a further boost.
The result also means Bank of Japan (BoJ) governor Kuroda is likely to reappointed when his term expires in April 2018. Inflation remains stubbornly low at 0.7% - someway off the elusive 2% target – but the BoJ is expected to continue with its current policy. It would be a mistake to write-off the impact of monetary easing, and there are signs that inflation is beginning to tick up, albeit slowly. Nominal GDP growth has been strong since the announcement of Abenomics, supporting an impressive rate of employment growth that has delivered Japan’s strongest labour market since the mid-1970s. There are tentative signs that wage growth is firming too, while domestic spending has accelerated as the nation prepares for the 2020 Tokyo Olympics.
On the fiscal side, the planned hike in the consumption tax from 8% to 10% in October 2019 will probably go ahead. Of the JPY 5 trillion the tax should generate, JPY 2 trillion has been earmarked for initiatives such as marking early childhood education free, and apparently further plans for boosting productivity will be released by the end of the year.
However, progress on the so called “third arrow” of Abenomics around structural reform may remain limited. It is likely that an increasingly large amount of political space will be taken up with defence and security issues, and related constitutional reform, especially given the threat posed by North Korea. This may reduce the amount of political capital that could be spent on supply side measures that tack vested interests. Indeed, even with his two-thirds majority, reform to Japan’s pacifist constitution will be an uphill struggle, given that Abe’s own coalition partners are opposed to the policy.
Overall, Abe’s win was largely expected and keeps the policy stance largely unchanged. Investors should not expect wholesale changes, but it does remove the tail risk that waning domestic support would see a sudden reversal in the BoJ’s policy. As such, it is likely to remain supportive of Japanese equities, and should keep the Japanese yen relatively weak.