Japan's Prime Minister Shinzo Abe's ruling party won
parliamentary elections Sunday, gaining control of the upper house
in a victory that gives Abe the political power he needs to fully
implement the structural reforms he wants.
Abe's Liberal Democratic Party's coalition won a majority of the
121 seats contested in the upper house elections, giving Abe
control over both houses. As a result of the upper-house election,
Japan no longer has each house under a different majority party, as
Goldman Sachs economists pointed out in a note published today.
That should speed up and simplify the process of getting bills
The victory was largely anticipated by the market, which
responded with a muted rally-Japan's Nikkei was up roughly 0.5
percent on the heels of the election. Japan-focused
were actually trading marginally lower Monday morning, a reflection
that the news had already been largely priced into recent gains,
according to analysts.
The iShares MSCI Japan ETF (NYSEArca:EWJ)-the largest Japanese
equities fund in the market, with $11 billion in assets-was trading
just under $12 a share, about 0.4 percent lower on the day, but
still near a two-month high. The currency-hedged WisdomTree Japan
Hedged Equity Fund (NYSEArca:DXJ), too, was trading some 0.8
percent lower, facing additional head winds from a slightly
The real challenge now lies ahead, as Abe works to formulate the
"third arrow"-or the growth strategy-of his so-called three-arrow
policy. The first two were "monetary stimulus" through the Bank of
Japan; and "fiscal stimulus" from the government side. Little is
actually known about how Abe plans to spur growth in an economy
long beaten down by deflation and a strong currency.
According to governing parties in Japan, this growth strategy
should be unveiled sometime in the fall, with promotion of capital
expenditures through tax relief coming in as the centerpiece,
Goldman Sachs said. The investment bank added that it doesn't
expect more "significant proposals" such as cutting effective
corporate tax rates or major labor market reform to be announced
any time soon.
The Third Arrow
Many had argued that the July 21 parliamentary election was the
last hurdle Abe needed to clear before fully implementing his
"I'd look at the second half of the year, as the time frame for
when we are going to see what they have up their sleeves to deal
with some of the big structural changes Japan needs," WisdomTree's
director of Research Jeremy Schwartz said in a recent interview.
Schwartz is currently in Japan on account of the election.
"Japan has to deal with an aging demographic; high uncompetitive
tax rates; and tax incentives to increase foreign investment in the
country. A lot of this is going to play out in second half of the
year," Schwartz said.
The Japanese yen was trading just under 100 to $1 Monday
morning, showing some muscle after having been as low as 103.18 to
the dollar as recently as late May.
"The central risk is that Japan is one of the most indebted
countries in the world," Schwartz said. "They have a high
deficit-they do a lot of spending-and they have to fund that
deficit spending through the issuance of new debt, and yet they
also have one of the lowest interest rates in the world."
In other words, Japan is a high-debt, low-interest-rate
"If they're going to have growth, they need to get out of this
deflationary trap they've been in," Schwartz said.
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