Japan Gives Green Light for More Abenomics

It is five big wins in a row for Japanese Prime Minister Shinzo Abe. His impressive victory in Sunday's Lower House election follows two earlier lower house successes and two in votes to the parliamentary Upper House.

All this puts 63-year-old Abe in a strong position to secure another term as head of the ruling Liberal Democratic Party next autumn. If he continues in the job until 2021, as now seems probable, he will become Japan's longest serving prime minister since the dawn of the parliamentary system in the 1880s, Nikkei reported.

Crucially for investors, this means an extended lease of life for the "Abenomics" reflationary policy regime under which the Nikkei Stock Average has soared from an extraordinarily depressed level to a 22-year high.

But there are growing concerns that the prime minister's focus on revising Japan's postwar constitution could hinder the implementation of much-needed economic reform.

With a renewed mandate for his signature Abenomics policy and the ruling coalition now holding a majority on every standing committee in the lower house, the prime minister will likely press ahead with fiscal spending and plans to divert increased consumption tax revenue toward providing free education.

The Liberal Democratic Party and its junior coalition partner Komeito intend to put together a two trillion yen ($17.6 billion) spending package by the end of the year to significantly increase spending on education and child care.

Roughly 1.7 trillion yen of the funds will come from the additional 5.6 trillion yen brought in by raising consumption tax from 8% to 10% in October 2019. On Sunday, Abe said this would take place "as stipulated by law, as long as there isn't an economic shock on the scale of the Lehman Crisis."

Balancing the Books

The proceeds of the tax hike had previously been earmarked for the repayment of national debt, and Abe's new plans could complicate attempts at fiscal reform. To avoid accusations of letting fiscal discipline slide, the government will need to make sizable cuts elsewhere in next year's budget, most notably from benefits and services for the elderly.

That may prove a difficult sell, however, with Abe having campaigned on a policy of "social security for all generations". The government is set to postpone a target of reaching a primary surplus in fiscal 2020, and fiscal consolidation remains a long way off.

Many market participants expect Abe's victory will lead the Bank of Japan to continue with large scale monetary easing for the foreseeable future.

The tenure of current BoJ Gov. Haruhiko Kuroda, the man behind the bank's aggressive monetary easing policy, comes to an end next year, but the markets seem to think he will be reappointed or someone with a similar stance will take his place.

Nikkei Hits New Highs

Japanese stocks hit their highest level since 1996 on Monday. The Nikkei climbed more than 1% in its 15th consecutive day of gains, a record winning streak for the index. The Nikkei index of 225 leading Japanese shares finished 239 points higher at 21,696.6.

The yen hit a three-month low against the US dollar, helping boost shares of Japanese exporters. A weaker yen tends to lift the shares of export firms because it makes their products cheaper to overseas customers.

However, Japan's fresh stock market highs also reflect a global rally, as the country's equity markets are tracking gains on markets elsewhere.

Eurozone Bond Yields Fall

Eurozone borrowing costs fell on Monday after a big win for Abe’s ruling bloc. It’s a reassuring sign for world bond markets as they brace for the European Central Bank to this week signal that it will take baby steps away from an ultra-easy monetary policy stance that has long underpinned bond yields.

The ECB on Thursday is expected to announce a cut in its monthly bond purchases, twinned with a lengthy extension of stimulus and a commitment to keep rates low for many years to come.

Japanese government bond yield erased an early rise as Abe’s win reinforced a view his reflationist economic policies will remain in place. The yield on the 10-year JGB initially rose to 0.080%, matching a 10-week high hit earlier this month, but it slipped back to 0.070% percent, flat on the day.

That set the tone for trade in European bond markets, with most 10-year bond yields down 1-2 basis points. In Germany—the eurozone’s benchmark bond issuer—10-year bond yields fell 2 bps to 0.43%, pulling back from roughly one-week highs at 0.46%.