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Snap Election in Japan: An Investor’s View

On Monday Prime Minister Shinzo Abe announced his plans to dissolve the lower house of Japan’s parliament on 28 September and to call a snap election in October. What will be the impact for markets against the backdrop of encouraging fundamentals but prevailing tensions with North Korea?

Thursday, September 28, 2017

The main reason for Abe to expedite the election timetable – besides his willingness to intensify political pressure towards North Korea – is to gauge voters’ approval to redetermine the use of the proceeds from the planned consumption tax hikes.

Japan’s consumption tax is expected to increase from 8% to 10% in October 2019 which would result in JPY 5 trillion (USD 45 billion) additional tax revenues. The government had originally earmarked JPY 4 trillion to pay down the government debt and another JPY 1 trillion for social services.

Now Abe plans to spend JPY 2 trillion (USD 18 billion) for education and nursing care services – namely free child care services and kindergarten for two to five year olds, free high school tuition for low income households as well as a salary increase for nursing care takers. This would lower the amount to pay off the debt and therefore the government may have to push back its target to regain a primary balance surplus by 2020.

Potential political headwind

Abe is obviously calling for a snap election because he is confident that the timing is right for a clear win of his party, the Liberal Democratic Party (LDP). According to a recent survey LDP enjoys support levels of around 44%, while no other party in the National Diet reached more than 10%.

Meanwhile, an interesting event occurred on the same day as Abe’s snap election announcement; Yuriko Koike, the Governor of Tokyo, proclaimed the establishment of the “Party of Hope”. The new conservative party has currently 15 members and it is expected to grow in the coming weeks.

Yuriko Koike was elected as Governor of Tokyo with a landslide victory in August 2016. In May 2017, she formed an alliance with centre-right party Komeito and took the majority in the prefectural election of July 2017 pushing out the LDP. Koike announced that the Party of Hope will oppose to the planned consumption tax hikes and proposed to defer it “until the nation feels economic recovery in daily life”. Although her political appeal and the momentum of her new party appear to be a headwind for Abe’s administration, the nascent movement is not likely to be powerful enough to change the dynamics of the snap election.

Markets should not be affected

Based on Japan’s current political landscape we expect the snap election not to have a significant impact on the local stock markets. We expect a majority for the LDP together with the allied Komeito. Even if Abe loses some steam and is replaced by another party leader, his economic policies will most likely be carried on by his successors within the LDP.

From a bottom-up perspective, earnings revisions in Japan stand out compared to other developed markets reflecting the sound global recovery and corporate efforts on margin improvement. Furthermore, external demand, domestic production, consumption and public spending are currently all supportive. Some sectors related to child care and nursing services may outperform if the planned stimulus packages are approved, however, the sector itself is not very large. The effects for most other sectors should be minimal, at least in the foreseeable future.

On the other hand, the tensions with North Korea remain a major source of concern. This has been overshadowing Japan’s solid fundamentals and it led the stock market to hover in recent months despite strong corporate earnings. The upcoming election, most importantly, may potentially result in more stability for Japan’s political scene which could alleviate the nagging geopolitical situation.

Important legal information
The information in this document is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained in this document may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information. Past performance is no indicator for the current or future development.