“There is no alternative.” UK Prime Minister Margaret Thatcher used this “TINA” slogan in the 1980s to promote the market economy as the only system that worked. Japan’s Prime Minister Shinzo Abe proved with his election victory on 22 October that there is no better alternative to him, or simply no need for one, even though the recent decline in his popularity might have indicated otherwise.
A big win
The governing coalition of Abe’s Liberal Democratic Party (LDP) and the smaller Komeito Party staged a big win in the snap election. Although recent public polls indicated a victory, the final tally was on the higher side of consensus expectations, including ours.
The coalition won 313 seats, securing two-thirds of the total 465 seats in the house. This is significant because it is a prerequisite for proposing amendments to Japan’s Constitution.
How we got here
The final result of the election is of course important for policy and for the markets, but equally important is the path Japan took to get here.
First, Abe didn’t call the snap election to address a major policy controversy. Rather, it was Abe’s gamble to defend himself against the criticism of his alleged involvement in scandals earlier this year. Second, despite his falling popularity, Abe has benefited lately from two tailwinds: North Korea’s recent threats that have bolstered support for his national security agenda and his decision to establish a strong relationship with U.S. President Donald Trump; and continued above-potential economic growth under his reflationary policy mix known as “Abenomics.” Third, a potential headwind for Abe turned quickly into yet another tailwind. Tokyo Governor Yuriko Koike’s new Party of Hope, initially a threat to the ruling coalition, only helped fragment opposition parties even more.
Swing voters were a key to the election outcome, and some probably chose the ruling coalition because there was no better alternative. But turnout was only 53.7%, slightly better than the 2014 election, but the second-worst postwar result, as a strong typhoon offered a good excuse for many to stay home.
What does the LDP/Komeito victory mean for economic policies?
Abe’s five consecutive wins in national elections should give him a great advantage in running for his party’s leadership (prime minister) in a year or so. With his consolidated power and the potential to become the longest-serving prime minister in Japan’s history, our expectations for policy include:
- The BOJ’s framework of quantitative and qualitative easing (QQE) and yield curve control (YCC) is very likely to remain in place. The probability that Bank of Japan Governor Haruhiko Kuroda will be reappointed next spring – the market’s base case and ours – seems higher, at least on the margin.
- Fiscal policy will likely remain loose and avoid premature tightening. Although the governing coalition’s stated commitment to hike the consumption tax (from 8% to 10% in October 2019) appears contractionary, Abe hinted during the campaign at an offsetting fiscal measure in 2018 and retains the option of not implementing the tax hike. Importantly, policy was already becoming de-facto monetary-financed fiscal stimulus. The election endorses Abe’s recent decision to postpone Japan’s primary balanced budget target beyond 2021, giving the prime minister more flexibility in fiscal policy.
- Fiscal policy is likely to focus on helping labor and younger generations and on enhancing productivity. This could raise the right-tail probability for growth.
- Although not our base case, Abe could possibly use fiscal policy to increase public buy-in for his controversial agenda for constitutional reform.
- Left-tail risk would rise if the Abe Cabinet fails to maintain public support or if developments go south, especially since the victory was won with low voter turnout.
Political stability and policy continuity are supportive for risk markets. Although the 14-day run-up in the Nikkei 225 Index before the election may have been pricing in the result to some extent, Japanese stocks should continue to perform well, supported by improving corporate fundamentals and relatively cheap valuations. The Japanese yen would normally depreciate as risk assets rise, but the currency is already at a low valuation.
With the Bank of Japan's (BOJ) QQE and YCC framework firmly in place, yields and spreads in the Japanese bond markets will likely remain compressed, which in turn will have global implications to some extent. But the continuation of the policy framework does not mean the policy will stay the same. We believe that Japan’s core inflation is likely to reach 1%, given our outlook for synchronized global growth, and that could prompt the BOJ to adjust its yield curve targets higher (most likely the 10-year rate). We also believe the BOJ will take a more flexible approach toward its 2% inflation target and start to calibrate its YCC based on economic and financial conditions.
For more on our outlook for Japan, see our Cyclical Outlook, “As Good As It Gets.”
is co-head of Asia-Pacific portfolio management at PIMCO in Tokyo and a contributor to the