“Sayonara [farewell] Japan, bastion of political stability,” Jesper Koll, a veteran financial analyst, economist and self-styled Japan optimist wrote in a commentary on the surprise outcome of the lower house election. Where does this leave Japan as an Asian economic power house and financial centre?
That is obviously a question which business and portfolio investors are asking with some urgency now that the Liberal Democratic Party (LDP) which has governed Japan for most of the post-war period has lost its majority in the powerful lower house of parliament.
The answer will depend upon the outcome of negotiations among the LDP and other minority partners, chiefly the Democratic Party for the People However, the Constitutional Democratic Party (CDP) is now the second biggest force and could itself seek to form a coalition government.
Meanwhile, the nation will remain in a state of political limbo until November 11 when parliament convenes to choose a new prime minister.
Either way, the authority of Shigeru Ishiba, the incumbent prime minister – who was elected president of the LDP and thus Japan’s leader only a few weeks ago – and his cabinet will be weakened, which analysts fear will create continuing uncertainty, not least for Japanese stocks and the yen.
In an extreme situation, Ishiba could find himself being ejected as Japan’s leader in favour of Yoshihiko Noda, the CDP head and a former prime minister himself. That is, unless the LDP and the CDP were to opt for a government of national unity led by the two parties. This is not out of the question at some point.
Much is at stake, and by no means just the fact that Japan is the world’s fourth largest economy after the US, China and Germany. The nation is an Asian industrial power house alongside China, a key investor regionally and globally, and the fulcrum power in the US-Japan security alliance in Asia.
Coupled with the US presidential election next week and the uncertainties this is creating over future US foreign policy, the political developments in Japan are of unusually high importance to global investors.
“In the world of money and investment, a key pillar to the “bullish Japan” thesis has been [that] Japan is a bastion of political and policy stability. After [the October 27] election, this will be become more difficult to argue,” Koll said.
It also raises the issue of the relative attractions of Japan and China as destinations for foreign direct and portfolio investment. The Tokyo stock market enjoyed strong inflows of foreign capital earlier this year – some of it diverted from a faltering Chinese economy – which pushed the market to record highs.
China’s economic image and fortunes have since been revived to some degree by hefty economic stimulus, which appears to have reversed flows to some extent. The sudden emergence of apparent political instability in Japan could push this process further, especially if it results in indecision over financial policies on Japan.
“Rare political instability continues to weigh on Japan’s markets after the election while Chinese markets digest yet another push from the People’s Bank of China to inject liquidity into the financial system,” according to a commentary published by Reuters news agency.
Hiromi Yamaji, group chief executive officer of the Japan Exchange Group, which operates the Tokyo bourse, said at a recent press conference that as a big and stable economy, Japan is “on top of the list as the alternative to China” for investors. But according to some analysts, that stability is now in question.
The economic impact may not be felt for some time.
“The Ishiba administration is expected to retain many of the economic policies inherited from the previous administration under previous Prime Minister Fumio Kishida,” Nikko Asset Management said in a commentary. “Market expectations had already been declining, so an unfavourable elections outcome may not have a direct negative impact on equities.”
