Japan: Politics to remain at the centre stage – BBH

The main interest in Japan does not lay with its economic data, but with politics this week, according to analysts at BBH.  

Key Quotes

“First, the LDP, with a comfortable majority is facing an increasingly disenchanted citizenry.  It lost the Tokyo election resoundingly, and the Abe government and the Prime Minister himself have been accused of abuse of power and favoritism.  The allegations and scandals led to the Defense Minister's resignation at the end of last week.  This is a prelude of a large cabinet reshuffle in the coming days.”

“Domestic problems in Japan are not as bearish for the yen as may be intuitively assumed. Japan's large net international investment position provides the wherewithal to repatriate savings back home.  Also, to address his low level of support, Abe would not be the first politician to offer a shot of fiscal stimulus.”

“A second political issue emerged before the weekend.  Due to a surge of imports of frozen beef, Japan announced that, in apparent compliance with the WTO, it has levied a surcharge on top of its customary tariff.  Currently, US exports of frozen beef to Japan have a 38.5% tariff assigned. Under emergency rules, the tariff rises to 50%.  The surcharge will remain in place through March and can be automatically imposed if imports surge by more than 17% year-over-year in any quarter.  But wait, the plot thickens.”

“The US and Australia account for 9/10 of the Japanese market for imported frozen beef.  Japan has a free-trade agreement with Australia, which is exempt from the surcharge.  Its normal tariff is 27.5% and is to be reduced in stages, according to the agreement.  Japan accounts for about a quarter of the international market for US frozen been exports.  US cattle futures sold off when the news was initially announced.”

“The Trans-Pacific Partnership agreement would have addressed these issues.  This may be one of the first tangible results of pulling out of the late-stage negotiations.  Still, it is surprising that Abe did not intercede.  The strategy that officials had intimated was to seek to avoid antagonizing an unknown, volatile, if not vitriolic partner.  This does the opposite, and before Finance Minister Aso and Vice President Pence hold bilateral trade talks later this year.  On the other hand, if the roughly $400 mln export issue dominates the agenda, then more substantive issues might not be discussed and thus strengthening the inertia that defends the status quo.”