Japan's election result changes nothing
Well done Mr Abe the newly re-elected political leader of Japan. You were brave enough to call an election and you got re-elected with a resounding majority.
Source: Japan Times
So resounding majority = reinvigorated radical policy zeal to help drive Japan out of the economic torpor of the last generation? Maybe not...
Here's the problem. Japan is between a rock and a hard place economically with the big fiscal deficits rubbing up against the already material use of extraordinary monetary policy. The key to breaking this economic Gordian knot is the much vaunted 'third arrow' of Abenomics focused on boosting the flexibility and competitiveness of the Japanese economy. So far it is an arrow that has barely flown.
The big challenge with supply side reform is that it cuts across interest groups and the benefits are often only fully seen a number of years in the future (not the greatest news for a politician today). To make it really work you need the guts, forward insights and sheer political will of a Ronald Reagan or Margaret Thatcher to force the issue. Both remain controversial figures but have you ever wondered why the ten years after their political careers at the top ended were - from today's perspective - hugely successful ones then step forward supply side reforms.
Source: Time.com
Abe is no Japanese Reagan or Thatcher. He is a cut above the recent stock of Japanese politicians on the basis that he has managed to stay in power for more than a year AND get re-elected but otherwise I see no desire to make as radical push as is required. A truly radical push would not just keep on pumping at the Bank of Japan but make attempts to sort out the fiscal deficits and liberalise the economy. After all the demographics don't lie: Japan needs to make full use of female workers and heighten immigration to give the economy a chance of sustainably moving forward whilst paying all its bills.
What I do see - by contrast - is using any re-election political capital to push through edgy nuclear power or defence legislation whilst baulking on a sales tax rise and using a weakening in the Japanese yen as a 'catch-all' source of stimulus. In isolation that buys time and leads as per this excerpt from today's Financial Times to some unusual and new sources of growth for the Japanese economy...
Source: The Financial Times
...the trouble is that if weakening a currency in perpetuity was a source to greatness then various emerging market countries would be in a position of economic leadership currently. A weak currency with no depth of real economic leadership to solve pressing issues leads to just one outcome: an even weaker currency and a bigger crisis.
So congratulations Mr Abe and enjoy the plaudits. The real work starts right now. As for Japanese investors the requirement is quite clear: becoming ever more trading oriented as it is going to be a bumpy ride.
