Abe dissolve Japan’s parliament but the growth will not stop

Japan’s Prime Minister Shinzo Abe decided to dissolve Japan’s parliament and call a general election for 22 October. PM Abe is seeking to take advantage of an improvement in opinion polling following his robust objections in international media to successive missile tests by North Korea.

Earlier in the year PM Abe’s approval ratings had suffered from a series of scandals and bad press. This is an opportunity for a fresh start and a re-invigorated voter mandate. Economic policy is likely to stay very loose and growth continue to exceed consensus forecasts.

The Liberal Democratic Party’s (LDP) election campaign is likely to focus on three issues – 1) accelerating the move away from a pacifist constitution, 2) staunching the rise of a new opposition party founded by Tokyo governor Yuriko Koike and 3) enhancing the vote amongst the young by offering government assistance with education. In the latter case, PM Abe has announced that he will take the proceeds from raising the general sales tax from 8% to 10% and use USD18bn for populist measures to support education for the young.

PM Abe’s campaign is starting from a position of strength where the LDP and its coalition partner control two thirds of the parliament. The risk is that Ms Koike’s intention to form a new opposition party leads to a reduced mandate for PM Abe just at the time when important reforms (labour legislation and licencing of casinos) are about to commence their passage through Japan’s parliament. Despite being an outside chance, we believe it is a potential outcome that should be taken seriously.

For Japan as a whole, two implications are important. First, if Abe does indeed emerge with an improved mandate it will be positive for defence and for education-related corporations. These are the sectors which will benefit from an increase in spending. Second, there is little if anything in these measures that will either improve the long-term growth potential of Japan or help the country achieve inflation of 2%.

As things stand, Japan’s economy is growing at rates that are beating consensus forecasts; at UBP we expect this to continue. The absence of inflation means that policy will not change any time soon to align it with balance sheet management strategies at the US Federal Reserve and probably the European Central Bank. For that reason, we are overweight Japanese equities across our client portfolios.

Mark McFarland – Chief Economist Asia – Union Bancaire Privée (UBP)