The Japanese Economy - The Result of the Lower House Election
Nomura Asset Management
December 21, 2012
December 20, 2012
At the lower house election held on December 16th, the Liberal Democratic Party (LDP) reclaimed power in a landslide victory, winning 294 seats or more than an absolute majority of 269 (i.e. able to appoint the Chairman and a majority of members in all 17 lower house parliamentary standing committees) out of the total of 480 seats as a single party. Together with coalition partner, the New Komeito Party, the LDP secured 325 seats giving it two-thirds of the total seats, which allows them to pass legislation by using the supermajority position in the lower house. This will enable them to overrule the upper house where no party currently holds an overall majority, otherwise requiring the LDP to consult with opposing parties. In addition, on an individual case by case basis, the LDP would be able to seek cooperation from the third party Japan Restoration Party.
Major political tasks:
In the short term, the focus will be a supplementary budget for fiscal year (FY) 2012, as well as the direction of the FY2013 budget. There is now an increased likelihood that the supplementary budget would amount to 5 to 10 trillion yen (60 billion to 120 billion USD) or more, as the LDP has been proactive especially in infrastructure investments.
The political decision making on the consumption tax increase in April 2014 is expected to start in the fourth quarter of 2013. The April-June 2013 gross domestic product (GDP) statistics should be the important determining factor then. Whether government funding is announced during the April - June quarter, as well as whether the overseas economies are bottoming out, would be crucial factors not only for the economic growth itself but also for decision making on the consumption tax increase.
It is also worth noting that there will be an upper house election in July 2013. This election may become an incentive for the new government to pursue some very aggressive policy measures.
In relative terms, compared with the Democratic Party of Japan (DPJ), LDP’s policies include proactive fiscal expenditure, monetary easing, and weaker yen policy. In order to maintain the level of its national vote in the next upper house (House of Councilors) election, the LDP will continue to make an effort to implement those claims.
Political pressure on the Bank of Japan (BoJ) is likely to increase significantly. The pressure is not expected to cause the BoJ to lose its independence, as the LDP’s stance is assumed to be cautious and focused on specific measures. The LDP will also face resistance from their coalition ally, the New Komeito Party, while it cannot apply the lower house super-majority to the BoJ’s personnel management. However, as the LDP has won a landslide victory, and given the upper house election in July, it is likely that the LDP would request significantly expanded monetary easing measures amid the BoJ leadership changeover together with monetary policy target setting.
More specifically, pressure would likely be focused on increasing the Japanese government bonds (JGB) purchases (extending the duration of the purchasing program, or even making it open-ended depending on the situation), setting a clear inflation target. (A negative interest rate policy or public-private joint foreign bond purchases are unlikely.)
The biggest difference by the DPJ is its commitment on infrastructure investments. Both the LDP and New Komeito have made strong claims that they will boost domestic demand using infrastructure investments. However, increased issuance of deficit-covering government bonds may be needed in order to carry out such a policy.
Investments in infrastructure may provide only a temporary boost to economic growth, or actually be linked to an increase in productivity or strengthening of competitiveness. This may work in an emerging country lacking the infrastructure itself to directly improve productivity through investments, whereas it hardly seems likely for a mature country such as Japan to further improve its productivity through such investments.
The underlying assumption is that government spending is merely bringing forward what was already planned. The DPJ’s “earthquake relief” budgeting had been created by adding on spending that was about to be frozen or was due to be implemented at a later date.
Nuclear power policy:
Nuclear power plant operations are likely to be restarted, although the government will have to pay attention to problems with individual power plants as well as wider public opinion. Opinions on whether or not to use nuclear power in the future are divided based on public perceptions and the economic standpoint. Nevertheless, the Japanese economy would suffer a significant impact if it immediately discontinued nuclear power operations. There are three major implications for this:
- Rising imports of fossil fuels to power alternative electric power supply or thermal power generation; no rise in exports and therefore no added value, leading to the deterioration of trade balance and economic growth. Nominal GDP is expected to decline by 0.5%.
- An increase in electricity prices due to increase in input costs. If the higher costs are reflected in tariffs, thereby shifting the burden to households, real income could decline. If the cost is transferred to corporate energy prices, this may lead to the deterioration in price competitiveness.
- Supply constraints due to power shortages: macro economy could suffer from supply constraints if there is a power shortage, although there is no significant effect for the time being. The negative impact on production would be limited if peak hour electric power usage can be reduced.
Although the LDP is discussing efforts to change the constitution as well as taking a harder line on maintaining effective control of the disputed island territories, it is unlikely that the LDP would actually seek to cause a deterioration in China-Japan relations before the upper house election or before a decision on the consumption tax hike. It is likely that the LDP will put more emphasis on the fiscal and monetary policy mix or on enhancing the U.S.-Japan alliance.
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