Japan’s election uncertainty


Call a snap election.  What could possibly go wrong?  Well, as embattled UK Prime Minister Theresa May could tell us (in between coughing fits) — plenty.  And yet Shinzo Abe, Japan’s premier, is set to go down the same path. Will he regret his decision to summon the country to the polls in October? At the time (late September), the move could have been construed as an adroit piece of political manipulation: Mr Abe hoped to exploit an ineffective opposition to garner more support for his stance on North Korea and his plans to increase the country’s sales tax. But change and uncertainty are integral elements of modern Japanese politics, and the situation no longer looks quite so appealing for Abe.

…things have changed rapidly in the days since Abe’s announcement. The DPJ, which has long been regarded as weak and disorganised, has disbanded. Now, there are new kids in town.

Until now, Abe’s Liberal Democratic Party (LDP) – something of a misnomer, given that it’s conservative – has held power along with junior coalition partner, Komeito. Of the 465 seats in the lower house of the Japanese parliament, the LDP had 287 and Komeito 35, meaning the ruling coalition had a just over two-thirds majority before parliament was dissolved. Its main opposition was the (liberal) Democratic Party of Japan (DPJ), but things have changed rapidly in the days since Abe’s announcement. The DPJ, which has long been regarded as weak and disorganised, has disbanded. Now, there are new kids in town.

Hope for the future?

Kibo no To (the Party of Hope) was formed by Yuriko Koike, the governor of Tokyo, just hours before the election was announced. Ms Koike is a former defence minister and newsreader who has previously contested the leadership of the LDP. She is not currently a member of parliament, however, and she cannot run for prime minister without becoming one. In order to do so, she would have to give up Tokyo’s governorship, and she does not wish to do this ahead of the city hosting the Olympics in 2020. In fact, she has stated that she will “100 percent” not participate in the contest. This left her in a difficult position politically: either to allow what could be her best shot at leadership to lapse, denying the Party of Hope an influential figurehead; or risk incurring the wrath of voters by deserting Tokyo at an important time. One of Ms Koike’s closest political allies has suggested that she will run for prime minister at the next general election.

Originally, it seemed that all of the former members of the DPJ would move across to the Hope party, but left-wingers are on the horns of a dilemma – whether or not to side with Ms Koike’s conservative movement. She has already stated that she has “no intention” of welcoming electoral candidates who do not fully support her policies. Left-leaning ex-DPJ politicians, led by the former deputy president of the party, do not back Koike’s plans to amend Japan’s pacifist constitution. Accordingly, they have created another new party, the Constitutional Democratic Party.

With only a short time remaining until candidates must be declared (official campaigning begins on 10 October, while the election is expected to take place on 22 October), there is little time for either of the new parties to make their policies clear to the electorate. So far, although Ms Koike appears to represent significant change in Japanese politics on a personal level, she has had difficulty conveying how the Party of Hope’s policies differ significantly from those of Mr Abe’s LDP. The two areas where they do diverge are nuclear power (she wants to phase it out) and the sales tax (he wants to raise it, she wants to freeze it at the current level).

Sayōnara, Abe-san?

At the time of writing, the numbers of candidates to be fielded by each party are still unknown. Abe says he will step down if he cannot retain his super-majority. While it seems unlikely that the Party of Hope, or indeed the Constitutional Democratic Party, will be able to oust the LDP, (a telephone poll in early October by Kyodo News put the support for the LDP at 24.1% versus 14.8% for the Hope party) there is a chance that Abe could be forced to resign. Election results aside, LDP party heavyweights (including ex-Prime Minister Koizumi) have been reluctant to endorse Abe. Reasons vary, but include recent scandals, Mr Abe’s desire for revisions to the constitution, his support for nuclear energy and weapons and his opportunistic calling of the election against a backdrop of increasing tensions with North Korea.

Against this, Mr Abe has cultivated an image of being a ‘steady hand’; after all, surviving as PM for five years (having also held the position for a year a decade ago) in Japan is no small achievement! His ‘Abenomics’ plan, a series of measures aimed at boosting the Japanese economy, has been under way for some time, with mixed results. Expectations for the ‘third arrow’ of the plan – structural reform – are relatively low. This is because corporate reform is taking longer than expected to materialise, meaning Japanese shares are trading at a discount to their true worth. The difference between the earnings of Japanese equities and their global peers (specifically in Europe and the US) remains significant, and companies in Japan are hoarding cash on their balance sheets rather than redistributing it to shareholders.

Nevertheless, the earnings picture has been improving, now that the performance of the equity market is starting to decouple from that of the yen. Historically, the prevalence of export-orientated companies in Japan has created a strong correlation between the two: if the yen falls, Japanese products become cheaper for foreign buyers, thus increasing exporters’ sales. The recent separation might indicate a strengthening domestic economic recovery in Japan.

External factors are also important drivers of the Japanese yen. Compared to all other major currencies, the yen is highly sensitive to US interest rates. It is also one of the most countercyclical currencies, moving against economic fluctuations. A setback or end to Shinzo Abe’s political ambitions doesn’t automatically imply a shift in Japanese central bank policy, but it does decrease the level of certainty on the direction of future policy. We await the election result with interest.


The article above was previously published on Aberdeen Asset Management’s ‘Thinking Aloud’ blog on 6th October 2017