Daily Management Review

If Tokyo Election Stings, Abe Will 'Pull Stimulus From A Hat', Markets Bet


06/30/2017




If Tokyo Election Stings, Abe Will 'Pull Stimulus From A Hat', Markets Bet
The stock market is betting that a poor showing by Japanese Prime Minister Shinzo Abe's party would be good for shares even though the premier has seen his popularity slump ahead of a local election in Tokyo following scandals and gaffes by officials close to him.
 
Abe would be spurned to act to boost the economy by a setback for Abe's Liberal Democratic Party (LDP) in Sunday's Tokyo Metropolitan Assembly election, seen as a bellwether for national politics, investors believe.
 
Even more than MSCI's world stock index which covers 46 markets, the Japanese shares have risen more than five percent this quarter.
 
In recent times, Abe's popularity, which looked rock-solid just a few months ago, suddenly crumbled and the outperformance which is the first time in three quarters, came midst sich an environment.
 
Possibly ceding a majority to a new party formed by popular Tokyo Governor Yuriko Koike, Abe's LDP was expected to lose about a third of its seats in the capital's assembly, predicted a survey this week by Jiji news agency.
 
Yet few investors are selling Japanese stocks and such investors include event-driven hedge funds that typically make large bets on political events. While the yen traditionally takes off as the environment gets riskier, the investors are also not betting on the possibility that there will be a rise in the safe-haven yen. 
.
"They think Abe will come up with some economic measure that is friendly to voters if his rating falls. They think Abe knows the rhythm he needs to buoy the government," said Kyoya Okazawa, head of global markets, Japan and Korea, at BNP Paribas.
 
Abe expects to submit a proposed revision to lawmakers before the end of the year and wants to accelerate plans to amend Japan's pacifist constitution.
 
In order to please voters and achieve his long-term ambition, investors suspect Abe will need economic stimulus.
 
"Abe's timeline on constitutional reform hints at a positive feedback between the national agenda and pro-growth economic policy: Not only can we safely rule out a premature policy tightening, but now the probability of added policy easing has risen," wrote Jesper Koll, head of WisdomTree Japan, an equity fund.
 
"The more ambitious the constitutional agenda, the greater the imperative to create a stronger 'feel good' factor for the voting public," he added.
 
Markets may be underestimating the impact of the election, some investors think.
 
More awareness about the likelihood that Abe's LDP will lose seats in the next national election, which must be held by late 2018 is likely to be risen by a clear-cut defeat in the upcoming Tokyo election, says Masafumi Yamamoto, chief currency strategist at Mizuho Securities.
 
"The LDP's retreat could be seen as 'the beginning of the end' of Abenomics, which has been the main driving force of the yen's fall and rallies in Japanese stocks," he said.
 
(Source:www.reuters.com) 






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