Japan: Upper House election provides vote of confidence for Abenomics – MUFG

Lee Hardman, Currency Analyst at MUFG, notes that the yen has weakened in the Asian trading session undermined both by the release of the stronger than expected NFP report and Upper House election results from Japan.

Key Quotes

“The results revealed that the ruling coalition captured 70 seats out of the 121 which were up for grabs. The LDP secured 56 seats and Komeito 14 seats. It provides a vote of confidence for Prime Minister Abe and his economic policies. With independents, there are now 165 supporters of constitutional reform in the 242 member Upper House.

Prime Minister Abe is now in a position to alter Japan’s pacifist constitution which requires securing a two thirds majority in both the Upper and Lower House. However, in light of the slim majority which gives bargaining power to the small centre-right parties, Prime Minister Abe has signalled he will proceed cautiously promising to “deepen the debate” on a constitutional revision.

More importantly, for the foreign exchange market and Japan’s economy the Upper House election result has provided a much needed vote of confidence in Abenomics. Prime Minister Abe has reiterated his pledge from prior to the election that “we have to accelerate Abenomics to meet the public’s expectations”. He wants the “swift formulation of comprehensive, bold economic measures” which will be the theme of the autumn parliament. Ministers have been ordered to begin work tomorrow on compiling a fiscal stimulus package to support growth.

Bloomberg has reported comments from one of Prime Minister Abe’s advisors that the fiscal stimulus package should total JPY20 trillion. The government is under pressure as well to unveil more convincing economic reforms alongside fiscal stimulus.

The prospect of further economic reforms and fiscal stimulus would help to ease pressure on the BoJ to deliver monetary easing. However, market speculation is also building that the BoJ is preparing to ease policy more aggressively fuelled by reports that former Fed Chair Bernanke has paid a private visit to Governor Kuroda. Still, our Tokyo analysts do not expect the BoJ to ease policy further this month.”