Japan’s ruling parties (LDP and Komei) secured a landslide victory in the lower house election on Oct. 22, despite Prime Minister Shinzo Abe’s relatively low support ratings.
Although four seats are still undecided (as of 11 a.m. on Oct. 23), the coalition has won 312 seats (LDP: 283, Komei: 29) out of a total of 465. This result is higher than any media estimates and even Abe said he did not expect such a big victory, according to Asahi News.
One possible factor for the ruling parties’ sweeping victory was bad weather due to a strong typhoon, which probably dissuaded some people from voting. The low turnout – about 53.6 percent, close to the historical low of 52.66 percent in 2014 – likely benefited the ruling parties.
Another big factor, in our view, was the splitting of votes among opposition parties. The new Party of Hope (PH) won only 49 seats, and Ishin-nokai, which supports changing Japan’s constitution, secured nine seats. The largest opposition party, the Constitutional Democratic Party, whose stances are typically in opposition to the LDP’s policies, took 54 seats.
In the short term, Abe’s landslide victory should increase expectations for a stable political regime. We expect the LDP to implement a supplementary budget of around 2 trillion yen (0.4 percent of GDP), and support the reappointment of Haruhiko Kuroda as Bank of Japan governor from April 2018.
Medium to long-term implications
We think the medium to long-term implications are neutral. Now that the LDP-Komei coalition obtained a two-thirds majority, it will likely focus more on changing Japan’s constitution than on implementing economic reforms in 2018. Also, the probability of a VAT hike, from 8 percent to 10 percent, as scheduled in Oct. 2019 has increased.
The PH’s lower than expected result could decrease the likelihood of ruling parties adopting its positions, such as discarding the VAT hike, tackling ample corporate savings and enhancing the corporate restructuring tax.
Furthermore, now that Abe has used the last resort of calling snap elections to regain political power, if his support ratings drop in the future, Abe’s situation within the LDP could be seriously in danger at the LDP’s representative election in September 2018.
Lower approval ratings could cause some opposition to Abe within the LDP, making it more difficult for him to realize his agenda (i.e. radical deregulation, fiscal expansion and tax reforms).
Neutral on Japanese equities
A big change to Abenomics is unlikely, in our view. The market is likely to focus on the sustainability of economic growth and on corporate earnings. Alongside the global economic expansion, we expect Japan’s economy to grow faster than trend for a while.
However, we think corporate earnings growth has already hit its peak. We expect EPS growth to decelerate in FY2018 (March 2019), thus limiting Japanese equities’ upside potential. We remain neutral on Japan in our global tactical asset allocation, and prefer stocks that benefit from Japan’s tightening labor markets or from the emergence of inflation.
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