Japan’s snap election could have ‘unintended consequences’

Tokyo-Japan-Asia-Night-700x450.jpgJapan’s prime minister Shinzo Abe has announced a snap election will take place on 22 October as he seeks the support to reallocate revenues from the planned 2019 sales tax hike towards social security rather than debt reduction.

While the consensus is that the LDP/New Komeito coalition should retain its two-thirds majority, Yasunori Iwanaga, chief investment officer at Amundi Japan, warns that if Tokyo mayor Yuriko Koike’s Kibo party gains significant votes in the election, Abe may have to reassess his plans.

“As we have seen in Europe electorates have a habit of disregarding market consensus. This is still possible in Japan with the charismatic Tokyo mayor Yuriko Koike’s Kibo party showing it has plenty of traction.

“This is most unlikely to translate into a majority, but if she makes big inroads on the incumbent parties, then Abe may well need to water down some of his plans for constitutional change. While this may not of itself upset investor expectations, such developments tend to bring with them the shadow of unintended consequences.”

However, Iwanaga says the snap election is “a smart move” that should serve Abe well at a time when the main opposition Democratic party is in turmoil and not well placed to fight an election.

“The markets have already reacted positively and the consensus is expecting a comfortable vote for Abe and his ruling LDP party in coalition with the Komei Party,” Iwanaga adds. “The hope is he will be emboldened to carry through his reform agenda leading to a primary balance surplus by 2020.”

Jesper Koll, head of WisdomTree Japan, says the increased probability of taxes going up in 2019 means its is more likely the Bank of Japan will have to do more to prevent “the inevitable recession that has always followed consumption tax hikes”.

“The political decision on the next consumption tax hike will have to be made in November/December 2018. This is by far the most significant macro policy decision Japan faces because all tax hikes in the past did force recessions as well as equity bear markets,” Koll says.

“For global money flows, this raises the likelihood of ‘de-synchronized’ monetary policy, for example the BoJ staying hard on the accelerator while the FED and ECB test ever more assertively the monetary policy brakes. At the G7 or in bilateral discussions with the US, Japan’s position would actually strengthen as it’s hard to be accused a currency manipulator when you’re changing the policy mix to address fiscal imbalances.”