Remember when Japanese Prime Minister Abe called for snap elections and set off a wild ride for the yen? Well, the lower house elections held over the weekend revealed that Abe and his men at the Liberal Democratic Party would be staying in power. What could this mean for the economy and the Japanese yen?
For one, a continuation of the ruling coalition’s leadership means that “Abenomics” would carry on. “We have the mandate to carry out our policies,” said Abe in a TV interview. This suggests that further economic reforms could be implemented, including adjustments in government spending and monetary easing.
Abe’s victory also reflects confidence in his policies, although this year’s sales tax hike has drawn a lot of flak for weighing on consumption and putting the economy in recession. Other plans under his administration include strengthening the Japanese military and reopening nuclear reactors, both of which are also faced with strong opposition.
Some say that the low voter turnout and the lack of a viable alternative were the only reasons why Abe was able to stay in power. Only 52% of the voting population actually joined the polls, a new post-war low compared to the previous house election’s 59% voter turnout in 2012. According to some Japanese citizens, Abe’s policies have hurt their spending capacity and don’t seem to be translating to economic improvements so far.
Others believe that two years in power isn’t enough to evaluate whether or not the current government is succeeding with its reforms. “Abenomics is still halfway through, and I feel a strong sense of responsibility to push it further,” mentioned Japanese Finance Minister Taro Aso.
It seems that the Japanese yen is receiving the news positively though, as the currency was off to a strong start this trading week. However, Japanese equities don’t seem to be too happy about the election results, as the Nikkei index was down roughly 1% during Monday’s Asian session.
Of course financial price action is still largely dependent on what Abe and his men plan to do next, as they might take some time to rethink their aggressive reforms. Bear in mind that Abe still plans to implement another sales tax hike but has assured that it will be pushed back from its original October 2015 time frame.
Either way, with Abe’s victory, it seems that it’s just a matter of time before another sales tax hike is announced, which might then spark another round of spending weakness for Japan and a potentially deeper recession. Do you think this would push the BOJ to ease again?