Japan's Nikkei Climbs Higher on Abe's Landslide Victory
Japan's benchmark Nikkei 225 index was up 1.2% on Monday boosted by Prime Minister Shinzo Abe's landslide election victory. It is on course to close higher for a record 15th consecutive day. Meanwhile, the U.S. dollar was up 0.16% at 113.68, its highest level since mid-July.
Photographer: Tomohiro Ohsumi/Bloomberg
With some seats still to be declared, Abe's ruling Liberal Democratic Party had secured 284 seats in the Lower House, well above the simple majority of 233. Coalition party Komeito looks set to win 29 seats. The Party of Hope, formed just weeks before the election and led by Tokyo Governor Yuriko Koike, performed poorly, winning just 49 seats. This saw the Constitutional Democratic Party (CDP) emerge as the main opposition party with 54 seats.
Abe's victory was broadly welcomed by analysts. Societe Generale strategist Frank Benzimra says that while many investors may'sell the news', Societe Generale remains bullish on Japanese equities due to booming profits and undemanding valuations. He says there are at least two consequences to Abe's victory:
Firstly, the probability that the PM appoints a dovish Bank of Japan governor when incumbent Haruhiko Kuroda's term ends in April 2018 has increased. While the monetary policy framework should remain broadly unchanged, we think fiscal policy could loosen further. Indeed, before the election the government signalled its intention to allocate more of the proceeds from the tax consumption hike planned for October 2019 to welfare spending.
We think the second consequence of Abe's victory could be a return of foreign investors. After the initial burst of enthusiasm for Abenomics (JPY15tn net foreign investor purchases in 2013), foreign investors have remained on the sidelines. Signs of a lower FX-equity correlation would make Japan an even more attractive investment proposition. Although the correlation remains high, we see some signs that it could decrease. These include rising corporate earnings despite a stable USDJPY. Unusually, the latest leg of the rally underway since February 2016 has occurred without any significant JPY depreciation.
Kok-Wei Yee, portfolio manager at Fidelity International, says says Abe's victory brings political stability which is positive for the financial markets:
Abe's strong election victory will likely be positive for the economy and the markets, as it reduces policy uncertainties over the mid-term. Sectors benefiting from Abenomics will continue to enjoy tailwinds, while the policy tilt to ensure economic prosperity gains are better shared will likely boost the domestic economy further. Education and the job market stand out in my view.
All the analysts agree that Abe's strong mandate paves the way for him to revise the nation's pacifist constitution and expand Japan's military powers. However, there are three key factors that will likely prevent him from being able to alter the key Article Nine of the constitution anytime soon, according to Scott Seaman, director at Eurasia Group:
First, the LDP's coalition partner, the Komeito party, remains reluctant to support near-term revision, and Abe must avoid alienating this party and its supporters as they provide the LDP critical help in elections.
Second, most voters are likewise reluctant to embrace the idea of revising the constitution given strong pacifist sentiment in Japan, concerns about Japan being pulled into far-flung military conflicts, and a desire for Abe to prioritize efforts to improve the economy over managing geopolitics.
Third, the CDP's status as the leading opposition party and its strong anti-revision stance will make it more difficult for Abe to push aside its objections without exposing himself even more to accusations that he is running roughshod over public opinion.
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