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Analysis: Political change in Japan

The elections to the Japanese lower house on August 30 are widely expected to bring about a substantial victory for the Democratic Party (DPJ). This would end the 50-year reign of the incumbent Liberal Democratic Party (LDP).

However, there is less agreement on what this historic change in government will mean for the Japanese economy.

The DPJ’s majority win in Tokyo’s municipal elections earlier this month, following a series of smaller local election victories, confirmed its position as the election frontrunner. However, the market reaction was subdued. The Nikkei fell by 2.6%, the drop attributed to political uncertainty.

After the last election, in autumn 2005, the Japanese market shot up by 40% in just under five months. Commentators are quick to identify this as an exceptional circumstance: a landslide victory occurring whilst the economy was already growing.

Bill O’Neill, a portfolio strategist at Merrill Lynch Global Wealth Management, has already ruled out a repetition of the events of 2005. He says the Japanese market is not looking particularly cheap against its international counterparts.

So how will the change in government affect the Japanese economy?

The DPJ promises radical reform based on a strong social agenda, with the aim of raising the income of lower- and middle-income households. Election promises include the creation of child allowances of ¥26,000 (£166) per month, improvements in social security, the scrapping of school fees, increasing university scholarships, abolition of road tolls, raising nurses’ wages and supplementing the income of farming households.

Daisuke Ishihara, a portfolio specialist at Chuo Mitusi, says this transfer of assets will be successful in stimulating consumer spending amongst lower- and middle income-houses. He has singled out retailers and service providers aimed at families, children and education, for particular benefit.

An increase in domestic spending will provide a significant boost to the Japanese economy, which remains heavily reliant on exports. However, in the short-term, substantial recovery is still strongly dependent on a global upturn, and particularly recovery in America.

One area where the Japanese export market is expected to see a surge in demand is environmentally-focused technology. The DPJ’s environmental policies, including doubling the target for reduction of emissions by 2020 (to 30% in comparison with 2005 instead of 15%) may provoke opposition from large companies.

However, Ishihara points out that stringent environmental policies implemented during the 1970s to combat pollution provided significant stimulus to the development of Japan’s environmental technology. Japanese companies focused on development of green technology, such as solar power and batteries, are likely to benefit from global fiscal stimulus.

The DPJ still faces questions on how it will fund its reforms, estimated to cost up to ¥17 trillion a year, given that Japan’s public debt is currently at 200% of GDP and rising. Whilst the party has promised to comprehensively reorganise the Y207,000 billion budget and save ¥9.1 billion a year through cost efficiencies and reducing wasteful fiscal spending, the budget bill scheduled for mid-December is likely to have the most radical effect.

The DPJ proposes to reduce government debt by selling off assets at central and local government level, essentially privatisation, as seen in Britain during the 1980s and early 1990s.

Lisa Fox, sales manager at Japaninvest, values Japan’s assets at ¥14,000 trillion. The ruling LDP does include asset sales in its Debt Action Plan, but has scheduled them for 2016. Fox says successfully passing the budget bill this year will mean significant fund allocations being made in favour of Japan by the end of December.

The current muted market reaction suggests that in the immediate-term, the social impact may be more significant than the economic. However, the potential of the world’s second largest economy moving into consumption, stimulated by a combination of domestic demand, recovery in the export market and a substantial reduction in government debt, cannot be overlooked.

Related Articles:
Japan trade surplus improves
Japanese prime minister dissolves lower house



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