Japan: Abe's 'gamble' turned into victory - Rabobank

Japanese snap elections turned out well for Abe as his LDP – Komeito coalition had around 313 seats, representing a supermajority in Japan’s lower house, explains the research team at Rabobank.

Key Quotes

“Abe’s call for snap elections had some initial logic, but could turn into a gamble after several kinds of opposition party reshuffles took place immediately after Abe called for these elections. The largest opposition party, the Democratic Party, merged partly with the new Party of Hope (PoH), a new party created by Tokyo Governor Koike and the newly formed Constitutional Democratic Party.”

“The disappointing election result for the opposition side is not surprising when one takes into account the short amount of time for a structured election campaign, as well as Koike’s decision not to run as party leader (and potential PM) after raising the PoH by herself. But after last week’s polls, it could already be seen that the remaining question was not if Abe and his LDP-Komeito coalition would win, but by how much. In the end, Abe’s coalition even reached a supermajority, while Koike’s Party of Hope even ended third in terms of lower house seats. As such, only the opposition landscape has significantly changed.”

“By getting at least 67% of the seats in the lower house, Abe gained a supermajority which not only could bode well for a third presidential term after 2018, but it can also fulfil his longtime ambition of revising the pacifist constitution. If Abe fulfills his campaign pledges, a couple of things are to be expected going forward. The scheduled sales tax hike currently scheduled for October 2019 is expected to pass as Abe announced the early elections partly for seeking support for a $18bn stimulus package on education and social welfare.”

“We would recall, though, that last time the consumption tax hike did not work out very well, but having this once again flagged in advance, one could see a victory by Abe as a mandate by the population. He also indicated that he opts to amend the constitution for which he needs to achieve a long-wanted revision of the so-called post-war pacifist constitution to elucidate the role of Japanese military. With this revision he could further bolster Japans’ stance towards North Korea. Next to these pledges, Abe’s victory implies a continuation of Abenomics, implying flexible fiscal spending, structural reforms and monetary easing, although the latter is more depending on Bank of Japan’s policy changes. But picking the new BoJ governor in early 2018 might be easier after reaching a stable position as prime minister.”

“The lack of inflation is an ongoing battle for the BoJ but increasing divergence of monetary policy between the BoJ on one side and the Fed and ECB on the other side, could lead to an even weaker yen. The Fed has already started to slowly and gradually wind down its balance sheet, whilst the ECB will likely announce its plans to gradually end quantitative easing during its interest rate decision on coming Thursday. The BoJ currently does not have any plans to end the highly accommodative monetary policy. Therefore, interest rate differentials are likely to increase.”