Financial Preview – 2014 Japan General Election

Since the start of November, when the Bank of Japan announced it was extending its quantitative easing plan, Japan has caused significant waves on the global markets with a string of high-impact announcements.

The immediate reaction to the Bank of Japan’s QE decision was to see the Nikkei soar as the yen collapsed; this situation was exacerbated by a strong dollar stemming from the US Federal Reserve’s own decision to end quantitative easing. Despite the overall strength of the Nikkei, the yen’s decline was much more indicative of the state of Japan’s economy.

Weeks after this Bank of Japan announcement, the extent of Japan’s economic problems were revealed, as the country slid into recession. This led to Prime Minister Shinzo Abe’s decision to call a snap election, an election that will be decided on Sunday 14th December. Alongside the election Abe postponed a long time-tabled sales-tax increase until April 2017. There was more bad news at the start of December, as Japan’s economy shrunk by another 0.5% prompted by a slowdown in business investment, and a previous sales tax increase that suffocated consumer spending.

Yet despite the continual disappointing data coming from Japan, with much of the blame based on the Prime Minister’s ‘Abenomics’, Shinzo Abe is still predicted to win the election. The Liberal Democratic Party, which Abe leads, is forecast to romp to a landslide victory as the Japanese electorate are still haunted by the failures of the Democratic Party, who were in power until 2012. This is not to say Abe is popular; both Abe himself, and his party’s economic policies, are not. However, with no viable alternative Japan is being forced to turn back to Abe following his savvy snap election call.

Due to the almost-certain victory for Abe and the LDPs, the election is being seen as a referendum on ‘Abenomics’. Prime Minister Abe’s punnily named economic policy is formed of ‘three arrows’; fiscal stimulus, monetary easing and structural reforms. These policies resulted in a reduction of Japanese unemployment, as well as aiding the Nikkei in reaching its currents highs. However, Abe’s three arrows dramatically harmed the yen, and following the BoJ QE decision, the US dollar has reached 7 year highs of 121 against the Japanese currency.

The early success of ‘Abenomics’ has given way to a shrinking GDP, a 23 month trade deficit run, as well as the aforementioned weak yen. These all contributed to Japan’s slide into recession, with serious questions being asked of Abe’s economic policies. The stock market boom for the Nikkei has failed to be felt in real terms for the Japanese public, as wages growth has stagnated despite rising prices.

Alongside the dismal state of the Eurozone, Japan’s economic situation led the IMF to downgrade 2014’s global growth forecasts to 3.3% from 3.4%. However, Japan’s economic weakness has led to big gains for the US. As mentioned, post-QE the dollar rocketed against the yen, helping the Dow Jones reach all-time record highs at 2014 comes to a close. A continuation of ‘Abenomics’ will be music to the USA’s ears, as it would allow the dollar to continue to function unimpeded by the yen, which would require significant economic changes to become resurgent. And if Abe and the LDPs can win the two-thirds of seats they need to oust their coalition partners, Japan could see the economy double-down on Abe’s economic decisions. This would lead to the speeding up of structural reforms in the labour market, tax structure and immigration that many how found to be lacking pace in 2014.

In the immediate run up, and aftermath, of the election, the yen looks set to continue to weaken, as an Abe-win would most likely mean more bad news for the currency. The Nikkei, which has been a big benefactor of Abe’s economic policies, will most likely see his re-election as a positive, and hopefully a short-term end to Japan’s instability. This could lead to the reclamation of last week’s gains, which have slowly been lost as the election grows closer.