Japan's LDP Party good for markets, says Nikko AM
21 December 2012
News, Asia, Japan
By Asia Asset Management
In Nikko AM’s market comment following the Japanese general election on December 16, John Vail the firm’s chief global strategist, investment strategy had the following to say:
The result was much as we anticipated although the margin of victory amplifies the effect and will very likely make the government much more stable than previous ones. There will now be even more support in the Upper House for the nomination of quite aggressive Bank of Japan (BoJ) leadership, as the results of the pressure on it have been successful in weakening the yen. This currency shift should also improve investment and consumption confidence in Japan.
The current sharply positive market reaction by Japanese equities reflects the anticipation of positive developments, and when a supplementary budget is enacted and other visible political measures made, we expect to see less volatile market movements. Our house view is that the TOPIX will rise to 899 by June, at which time the yen should be 87: US$.
Needless to say, the Japanese economy is susceptible to international economic trends, especially US fiscal cliff developments. However, we expect a fairly benign resolution to this matter, without much negative effect in mid to long term.
Meanwhile, the shale gas energy revolution is causing fundamentally positive change in the US economy, both currently and in the long-term (which should benefit Japan, in kind). This should also be supportive of strong US dollar, especially versus the yen. As for the euro, although we expect reasonable stability during the next two quarters, it is likely to struggle relative to the dollar in the long-term, as the European economy will likely continue to stagnate. As a noteworthy exception, we believe the Australian dollar will remain very firm versus the US dollar.
In terms of international relations, this election will likely bring the rest of Asia ex China closer to Japan, while political and economic relations with China will likely remain cool. The US likely supports an increase in Japan's defence spending, so the alliance is likely to remain quite strong.
In sum, the margin of the LDP victory was a surprise and solidly reinforces the trends we have already anticipated in the markets. Many have thought that Japan will never change and its politics will always be dysfunctional, but the stability of this government looks much better and the appointment of new BoJ leadership for a five-year term, will hardly be a short-term development.
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