A quiet end for the Japanese stock market the day after Prime Minister Shinzo Abe’s Liberal Democratic Party and its coalition ally, the Komeito Party won control of the country’s upper house, thereby opening the way to three to four years of stable government and quite possibly sweeping reforms.
The Tokyo market ended up just half a per cent after a day of volatile trading as investors couldn’t make up their minds if the election win would be immediately positive for companies.
Importantly the win by the government helped push Japanese bond yields lower yesterday.
Analysts say the victory should now see some of the recent volatility in 10 year bond yields dissipate as the market became more confident that the government will meet its target of boosting inflation to 2% and breaking the grip deflation has on the economy.
Yields on 10 year bonds eased to 0.78% yesterday in Tokyo down from 0.81% on Friday and 0.88% a month ago. The yen traded around 100 yen to the US dollar yesterday and overnight.
The election result produced muted reaction from other markets in Asia – Australia finished higher (up around half a per cent) and Hong Kong was firmer, but China rose and then fell as investors worried about the impact on banks from the government’s move to abolish controls on loan rates.
The most obvious parts of the government’s radical policies has been higher spending (on that old Japanese standby, infrastructure, which helps many of the government’s big corporate backers) and the huge spending program from the Bank of Japan, which started in April.
JPYUSD YTD – Japan’s nuclear industry looms as test for Abe Government, and currency
Prime Minister Abe has also outlined a “national growth strategy” that includes structural reforms and deregulation, but so far it’s been mostly big picture and few details (which is where entrenched Japanese interests could very well neuter the changes).
Mr Abe has promised more details in a speech and reform announcement in September. That is likely to leave an note of uncertainty in the minds of investors.
Many of Mr Abe’s mooted changes will require new legislation, which he will be able to pass more easily with the entire parliament under LDP control. He still has to get his changes through the conservative and risk-averse LDP.
Already there have been comments by at least one new LDP member calling for the government not to enter into free trade agreement with the US, or The Pacific Partnership (TPP), which has become one of the major policies promoted by Mr Abe.
Although he has ruled out doing anything to undermine the farm sector in Japan, which means the agreement, if it comes, will not be ‘free trade’ but conditional. The US farm lobby, which refuses to accept greater foreign competition, would agree with that stance.
But perhaps the touchstone policy change will be an attempt to restart nuclear power stations across Japan and recommit the country to the sector playing a part in Japan’s energy future.
The previous government committed Japan to abandoning nuclear power over the next 20 years after the tsunami and earthquake set off the Fukushima nuclear power station crisis, the worst Japan has encountered since the atomic bomb attacks which ended World War 2.
Mr Abe and some of his ministers have been making mutterings about a possible change (kite flying as they say in politics), but opposition from Japanese voters to nuclear power has grown in the past two years and there are still weekly protests in Tokyo.
All but two of Japan’s 50 nuclear plants remain closed in the wake of the Fukushima Daiichi nuclear disaster following the March 2011 earthquake and tsunami (many were closed for normal maintenance inspections by local governments who then have refused them permission to re-open).
Japan has been importing more coal, LNG and oil to make up for the loss of energy from the nuclear power stations. Australian LNG exporters are among those to benefit.
The LDP has given cautious support to the reopening those reactors that meet safety concern.
Japanese regulators are currently evaluating applications to restart 12 reactors at six nuclear facilities, with a reactor run by Shikoku Electric Power Co the first test next month. Tokyo media reports yesterday said that securing agreement from some local governments may be difficult.
Any move to restart the closed stations would take years, so investors in Australian uranium companies shouldn’t get their hopes up too quickly. There’s still a way to go.
Interestingly, India thinks the win may hasten its move to buy nuclear technology from Japan for its program of new power stations. The two countries agreed in May to accelerate talks on India buying Japanese nuclear power technology. The talks started three years ago but were halted by the Fukushima crisis.
Other moves to watch from the Abe government include decisions on a GST (sales tax) increase next year, cutting the corporate tax rate, changing labour laws and regulations and social welfare spending reforms.
The big overwhelming problem is the country’s huge debt burden of more than 200% of GDP, which is being ignored in the current spending push, but which will come back to haunt the government should the economy slow or not grow as fast as wanted, or the lDP oppose some of the Prime Minster’s reform ideas.
