December General Election Critical For Japanese Macroeconomic Outlook
The BOJ left the monetary stance unchanged in November. While the outcome was widely anticipated, the real focus is in December. Ahead of the next BOJ meeting on December 19-20, the FOMC meeting in the US on December 11-12, release of the Tankan survey on December and Japan's general election on December 16 would likely complicate the monetary decision. The latest trade report of Japan was disappointing. Exports to China continued to drop due to continual anti-Japanese sentiment amid Diaoyu/Senkaku islands dispute.
After the Japanese government dissolution of the lower house on November 16, a general election will be held on December 16 with election campaign beginning on December 4. Given the dramatic decline in support for the DPJ, it's likely that the LDP would return to power. Indeed, the LDP's victory would lead to radical changes in the monetary and fiscal policies in the country. Former Japanese Prime Minister and head of the LDP Shinzo Abe stated last week that 'Luckily a new BOJ governor will be chosen next year, and the government will be able to have a strong voice on the decision', indicated that he would change the BOJ governor to a more dovish one should he regain power.
The opposition party LDP has made a number of pledges concerning fiscal and monetary policies such as making law to strengthen Japan's infrastructure and the resultant 10% hike government spending from the current levels, introducing inflation target of up to 3% and accountability of the BOJ governor if the target is not reached in the long-term, and adopting additional monetary easing. This signaled that the upcoming BOJ governor and deputy governor would face more political pressure than before. Although the Diet passed legislation to increase the consumption tax rate from the current 5% to 8% in April 2014 and then to 10% in October 2015, there's possibility that the LDP will back away from it due to the growing number of members opposing the plan. The market has been pricing in a LDP victory and potential changes in the domestic and overseas policy to be brought about by the new government. The decline in Japanese yen was also driven by anticipation of the dovish government.
Japan's trade deficit narrowed to 549B yen in October from 561.7B yen a month ago. Unfortunately, the result came in much worse than consensus of 360B yen. On annual basis, the figure almost doubled 283B yen recorded the same period last year as decline in exports (-8.2% y/y) outweighed the decline in import (-1.1% y/y). Territorial disputes between China and Japan continued, leading to continual weakness in exports to China, the world's second largest economy. Shipment was reported to have dropped -11.6% y/y last month, compared with -14.1% in September. Prolonged anti-Japanese sentiment in China would harm Japan's trade oulook as China takes up around 18% of Japan's total export