Japan’s Democrats To Win Upper House

The market has reacted well to the economic direction that Prime Minister Shinzo Abe has taken since winning election in December. The Nikkei has risen from 9446 at the end of November to stand at 14590 on Friday, a rise of 35%. During this period, the Yen has depreciated against the Dollar from a rate of 82.5 ti stand at 100.5; a fall of approximately 22%. The Yen’s decline makes Japanese goods and services cheaper abroad and means that repatriated foreign earnings are more valuable, but the flip side is that the nation has to pay more for raw materials (virtually all of which Japan imports).

Japanese voters went to the polls on Sunday to elect 121 politicians to the upper house. It seems likely that Mr Abe’s Liberal democrats and their junior coalition partner will take control of the house, winning 76 seats. The result is important, not least for the reason that Japan is still the third largest economy in the world but because it means that Abe has ended six years of stalemate and now controls both houses. This should mean that he has free-rein to implement his economic reforms, dubbed Abenomics. Key to his vision is that the Bank of Japan should do all that it takes to end price deflation which has dogged the Japanese economy for many years. Deflation tends to suppress domestic demand since consumers delay major purchases for as long as possible in the knowledge that the product will be cheaper in the future. The Bank of Japan is targeting an increase of inflation to the 2% level. Mr Abe is not specifically aiming to weaken the Yen (or so it is claimed), but the currency has fallen as a consequence of his policies.

The response of the Japanese markets to Mr Abe’s victory on Sunday has been fairly muted. Analysts suggest that his victory had already been priced into the markets. Japan will not expect to hold fresh elections for a further three years, giving a period of stability for his economic reforms to take effect.