Abe wins, but reforms may still go slow

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First policy measure will be fiscal stimulus worth 0.6-0.8% of GDP.  Next step for Abe will be to announce the new Cabinet, which is scheduled for Christmas Eve and the fiscal stimulus should be announced on December 26. Since he just reshuffled his Cabinet, the new one should look very similar. In addition, the fiscal stimulus should not be a surprise to markets. This was discussed after the very weak Q3 GDP and the measures will focus on increasing household consumption after the negative impact from the hike in VAT tax. The base amount should be 0.6% of GDP but some Abe advisors are calling for 0.8%.  Following the fiscal package, next on the agenda will be a corporate tax rate cut by 2-3 percentage points around April.

Abe received a mandate to reflate the economy, which will be negative Yen and positive for the equity market.  Abe ran on a campaign to reflate the economy over the next two years so that the economy will be strong enough to withstand another VAT hike to 10% from 8% by April 2017.  Abe’s reflationary policy should be more effective in the next two years compared to the first two since both monetary and fiscal policy will be expansionary whereas before only monetary policy was expansionary.

Structural reform will be slow.  Structural reforms, which only show progress over the long-run, will be delayed.  In the meantime, Abe will focus on restarting nuclear power plants to reduce electricity prices for households and corporates.  Abe’s plan is to get the safest 2 plants started and build momentum to restart the other 17 plants that are going through the approval process.  Locals and anti-nuclear groups will protest to prohibit the restart but Abe will work to get them going.  On other reforms, Abe has mentioned improving labour market flexibility, addressing declining population and reforming the healthcare sector but progress will likely be slow since they face more opposition and the benefits will be difficult to measure for his next re-election that takes place 4 years from now.

Short term headwinds.  Although Abe’s victory will lead to weaker yen and higher Nikkei by end of 2015, they face short term headwinds. S&P is facing headwinds and risk sentiment overall are suffering. Nikkei has foreign ownership of about 30% and is heavily impacted by global market sentiment. If S&P is correcting, global fund managers will have to reduce risk and foreigners own enough of Nikkei to hurt its performance.  Since foreign equity holders of Nikkei are shorting Yen to protect their gains, Yen will strengthen from fall in Nikkei. For risk sentiment to stabilize, we are looking for oil prices to stabilize and get more clarity from the Fed on how fast US interest rates can rise.”

 

Sean Yokota is head of Asia Strategy at SEB

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