The news cycle from Japan has picked up this week. There is more evidence of an accelerating business cycle being compounded by a voter backlash against Prime Minister Shinzo Abe’s ruling party in the Tokyo Metropolitan Assembly election held Sunday, as well as growing evidence of rising geopolitical tensions in North Asia (with President Trump calling both PM Abe and China President Xi Jinping over the weekend). While the rising geopolitical tension adds an unfortunate new layer of complexity, the impact of the latest developments adds to our conviction that policy complacency is about to turn into pro-growth, pro-reform policy activism in Japan. Specifically, we expect rising evidence of added fiscal stimulus to be presented in coming quarters, with monetary policy following suit because of the de facto monetization of the added fiscal deficit.
Capex Cycle Accelerating
On the data front, the latest TANKAN survey confirmed a general upward trend in business conditions, led by blue-chip exporters reporting a larger-than-expected uptick. More importantly, business investment plans were revised sharply upward, from growth of .6% one quarter ago to growth of 8% expected now.1If, as we suspect, this will lead to a pickup in machinery orders growth in coming months, confidence in Japan’s economic and profit growth performance potential will rise, in our view. Bottom line: today’s TANKAN suggests 2017 and 2018 gross domestic product (GDP) growth could be closer to 2% to 2.5% rather than the 1% to 1.5% expected currently by the analyst consensus.
Tokyo Voter Backlash a Wake-up Call for PM Abe
On the political front, the Tokyo Metropolitan Assembly election was as much a victory for the charismatic Tokyo Governor Yuriko Koike as it was a loss for PM Abe’s ruling Liberal Democratic Party (LDP). Governor Koike’s newly established Tokyo Residents First party and its coalition partners won 79 of the 127 seats of the Tokyo Assembly, leaving Abe’s LDP with only 23 seats for its worst showing in postwar history.2 A combination of factors drove this result, with the LDP ensnared in a series of scandals. While the substance of these allegations is generally viewed as relatively minor in nature, even stout supporters of “Team Abe†admit that the way LDP leadership has dealt with them revealed a certain “arrogance of power.†The Tokyo voter backlash confirmed that, after four years in power, the ruling LDP may have become a little complacent and insensitive to the demands of its true power base, the Japanese people. For PM Abe, the loss in Tokyo serves as a welcome wake-up call and, in our view, pro-growth policy activism is likely to have an effect in coming months.
