Japan: "Abe or not Abe" That is the question
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Japan: "Abe or not Abe". That is the question

Conservative parties are gaining ground on the LDP. The debate is centered on the viability of a third run by Prime Minister Shinzo Abe.

The dissolution of Japan's House of Representatives was formally announced by Prime Minister Shinzo Abe at a press conference on 25 September. Subsequently, 10 October saw the announcement of the general election with voting scheduled for 22 October.

A Potential Long-term Mandate for Mr. Abe

The most likely outcome of the election is that Mr. Abe's policies, including his monetary policy, based on massive quantitative easing, will largely remain in place.

However, constitutional reform is important for Mr. Abe and he may incorporate policies (such as a fixed consumption tax rate and investment in companies to revitalize the economy) promoted by opposition groups such as the Party of Hope to maintain conservative support for constitutional reform and to ensure that his initiatives proceed smoothly. A third term as prime minister is still possible for Mr. Abe, even if he loses two-thirds of the majority held by the ruling coalition.

Political stability is likely to assist Japan's steady economic recovery and have a positive impact on the market. The stock market can be expected to perform well, particularly in economically sensitive sectors. Additionally, certainty that Japan's monetary easing policy would be maintained will likely result in Japanese government bonds stabilizing at low interest rate levels, while the pressure from the yen's appreciation continues to recede.

Alternative Outcome: Party of Hope Becoming a Powerful Political Adversary

In the event of the LDP and Komeito maintaining a collective majority, a coalition government is preserved and the Party of Hope becoming a powerful political adversary: To succeed in his initiatives on constitutional reform, Mr. Abe will be forced to substantially acquiesce to demands of the conservative opposition on other policy matters. Though there is likely to be a broad agreement to maintain large-scale monetary easing and avoid jolting changes to fiscal policy, the planned consumption tax hike will be dead in the water. Furthermore, support for policies where Abenomics' efficacy has been criticized, such as the promotion of wage increases, corporate investment, and deregulation, is likely to strengthen. The probability that Mr. Abe will seek a third term should decrease, followed by a "post-Abe" evaluation of subsequent trends in Mr. Abe's support rate. On the policy side, populism is likely to strengthen as politicians vie for popularity in a "post-Abe" political landscape.

A struggle for political leadership will make it more difficult to predict Japan's future policies, but the likelihood that renewed populism will ultimately spur structural reform will also increase. We believe that there will be renewed pressure on monetary policy as a hedge against the risk of disruption from structural reforms and an economic downturn, and consensus will seek to maintain the current monetary easing. As a result, though some turmoil will manifest in the stock market immediately after the election, the stock market is likely to reverse upwards as expectations for both change and sustainable growth are maintained.

Risk Scenario Outcome

A full-scale review of Abenomics will be initiated in the unlikely event of Party of Hope forming a new coalition government, increasing the prevailing level of political and policy uncertainties. The market will start anticipating the resignation of Haruhiko Kuroda as Governor of the Bank of Japan and begin evaluating the possibility of a revision in monetary policy. The stock market will likely disapprove of a policy deadlock and experience adjustment pressure, while upward pressure on the Japanese yen may increase as the FX market incorporates the possibility of reform.