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Initial Thoughts on Japan's Election

Marc To Market's picture





 

 

The outcome of Japan's election seems to be largely in line with market expectations.  The Liberal Democrat Party won handily.  It appears to have secured a majority of lower chamber of the Diet.  

 

There had been some reports suggesting that it might be able to achieve a super-majority of 2/3, but this does not look to materialized.  However, with its traditional party, the Komeito, together it may. 

 

In any event, this is a strong mandate for the LDP's agenda.  It is a combination of nationalism and what passes for socialism in the neo-liberal age, namely increased government support for the economy via 1) massive public spending and 2) unlimited monetary easing.

 

Facing territorial disputes with China (among others) and North Korean missile development, the LDP advocate amending its pacifist constitution.  For this the LDP may also count of support from the Restoration Party, which may have been one of the big winners of the election.  

 

The Resortation Party began off as a small regional party in Osaka and its members of parliament were largely defects from other parties and have emerged this time as the third largest party in Japan, not far behind the DPJ.  

 

The leader of the Restoration Party is none other than the previous governor of Tokyo (Ishihara) who instigated the purchase of the disputed islands, which was done in a clumsy way and spurred an undesirable  but not unpredictable China's retaliation. The real founder of the party is a princeling (Hashimoto) who will remain mayor of Osaka.  Ishihara is now in the Diet and will have an increasingly national voice. 

 

As noted in our review of the positioning in the futures market,   the short-term speculative market has amassed a very large short yen position.  Outside of the 2005-2006 period, a hey day of using the yen as a funding currency (yen carry trade, a source of leverage in the latter stages of the credit cycle), the gross and net short yen position in the futures market is extreme. 

 

The Japanese stock market has been a big beneficiary of the decline in the yen.  This makes sense and is in line with long-term historic relationships.  What is, perhaps, most surprising, in the recent price action is the fact that the JGB market has held up so well.  Little sign of investor concern that the new government will pursue aggressive monetary and fiscal policies that are designed to push up inflation and inflation expectations.  

 

Currency traders and equity investors are not resisting the likely thrust of policy.  The debt market seems to be.  Even the CDS pricing shows no heightened concern. 

 

The first instinct for many may be to sell the yen on the news and ahead of the BOJ meeting.  The BOJ is expected to extend its asset purchase program (QE).  However, given the magnitude of the recent move and positioning, we cautious about chasing the market before a correction.    

 

 


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Mon, 12/17/2012 - 01:13 | Link to Comment pragmatic hobo
pragmatic hobo's picture

problem with Asian countries, other than those of dictatorship like China, Singapore, etc, is that they are true democracies where people's vote actually count. That makes it very difficult for any continuation of policies. In the USA, and in EU for that matter, we know that the shadow government runs the policy with latest incumbent as the mouth piece. The election is largely rigged by the big money powers to dissipate and nullify the voice of majority. Therefore, like in China, the US policy can maintain continuity of continuing the assault on workers right, taking away the rights of citizens, keeping wages low, keeping cost of living high, and basically indenturing the population in debt servitude so they remain powerless slaves, all for the benefits of the top 0.01%. If Japan ever wants to get out of the economic hole they are in they have to either install military dictatorship or corporate dictatorship. Otherwise they will continue on as rudderless boat in ocean for another 20 years.

Mon, 12/17/2012 - 01:31 | Link to Comment suteibu
suteibu's picture

Japan is a parliamentary republic (British model) controlled by its bureaucracy which has long been corrupted by corporate and special interests, among them, the US.  The political battle in Japan is to wrest power away from the bureaucracy and into the hands of the political class, pathetic though it may be.  Hatoyama and Ozawa tried to accomplish this after winning the 2009 election but were quickly undermined by the bureaucracy in conjunction with the US government which did not like Ozawa's idea of closer ties with China and a "more equal" relationship with the US.

Sun, 12/16/2012 - 19:49 | Link to Comment Dan The Man
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"It appears to have secured a majority of lower chamber of the Diet."   

lower chamber of the diet?...Bah!  That's funny.

Sun, 12/16/2012 - 18:38 | Link to Comment suteibu
suteibu's picture

"Japan's policy is changing due to its own internal dynamics."

"It is true that China is Japan's largest trading partner.  Yet, I do not see that as holding Japan back from confronting China over the disputed territory.  I read the course of events to suggest the timing of the flare up between the two was prompted by Japan "nationalizing" the islands."

Japan, like the US, has massive investments in China which are suffering because of this conflict and Japan, Inc. would like to see it go away.  So would the Americans who are highly conflicted in the region and do not want to have to back Japan in open dispute.  Much of the rhetoric coming from Japan was internal politicking, first to force and election and then to set the meme.  That said, Abe was very conciliatory toward China in his first term as PM.  It is in everyone's interest to resolve this dispute.  On the other hand, for China, this issue is also directed at the US who has been pressuring China in West Asia and it would like nothing better than to see Ozawa's vision of a "more equal" relationship between Japan and China and the US.  And, in fact, this is the best option for the Japanese.

"There is no choice between the east and west for Japan.  Neither one is homogenous or a bloc that can be joined.  It remains a firm ally of the US, while located in the Pacific.  It depends on open sea lanes.  Its relationship with many countries in the northern Asia remain strained."

This is merely the American interpretation.  Japan has been forever trying to be a Western nation since the 1850's with mostly negative outcomes.  It has proven over the past 6 1/2 decades to be a responsible Asian nation, the idea that it would revert to Imperialistic goals simply a tale told by the Americans to keep Japan (and other Asian nations) dependent on the status quo.  Trade and good relations with its neighbors are the only path for Japan if it is to remain an economic and political power.  The Cold War mentality of being a US surrogate in Asia no longer returns value to Japan.  With a move away from the US and towards a growing Asia, Japan enhances its economy and its security. 

As for anyone closing the sea lanes, only America stands to profit from such a move per its Air Sea Battle Plan meant to confront China.  The US needs Japan more than Japan needs the US, an idea that is germinating in Japan.

Sun, 12/16/2012 - 20:34 | Link to Comment Marc To Market
Marc To Market's picture

I do not see this at all.  The spat with China may be costing Japanese companies sales in China, but I see no concillatory sign from the LDP.  The pivot to Asia by the US is a funciton , I think, of their acceptance as HClinton has said, of a Pacific Century.  For nearly a quarter of a century, more goods go across the Pacific than the Atlantic.  Countries with territorial disputes with China are inviting the US back, including ironically Vietnam.  

Nor do I accept that the argument that I offer is just the American interpretation.  Again that assumes a homogenity that simply does not exist.   That is to say there are different American interpretations just as there are different Japanese interpretations.  

In my view, what you call Japan wanting to be a Western nation is really wanting to be integerated into the global system of trade.  Japan has not enjoyed the political power and soft power commensurate with the importance of its economy.  This can quantified in a number of different ways.

Abe and much of the political elite in Japan do things still that antagonize is neighbors, such as visiting war shrines and reluctance to reconsider its historical narrative.  Unlike China, which allowed foreign multinational companies to help develop the countriy, Japan was traditionally reluctant to encourage foreign direct investment.  The cost was denying itself a fifth column in the US to lobby for it as some US companies do on behalf of their interest in China.  

Sun, 12/16/2012 - 22:24 | Link to Comment suteibu
suteibu's picture

"The cost was denying itself a fifth column in the US to lobby for it as some US companies do on behalf of their interest in China.  "

An additional note on this statement.  It is precisely this that concerns Japan, that because of America's massive economic conflict of interest in the region, it will not honor its security treaty with Japan.  Why would the US enter a conflict with China when so many US corporations will lobby the government to keep its hands off so as not to threaten their investments.  Look what happened to Japanese companies in Japan over the island issue.  besnook has it right,

"according to the aformentioned security treaty the usa is obligated to help japan defend those islands. china's strategy is to show japan that they cannot depend upon the usa to help them defend the islands so they don't need the usa military umbrella. this may be part of the more assertive position abe has taken on an independent japanese military. the entire incident is a test of obama's recent proclamation to refocus on usa influence in the pacific. the remilitarization of japan is strictly a sovereign state issue. it is not to provide abulwark against the rise of china in service of the usa. "

Sun, 12/16/2012 - 22:06 | Link to Comment suteibu
suteibu's picture

One need only look to the first term Obama administration to see the difference between pre-election rhetoric and post-election actions.  They are not often the same.  Only time will tell about Abe relationship with China.  However, I reiterate that he mended ties with China after Koizumi left and the Chinese are sure to be hopeful for a replay.

You are wrong about Japan's desire to be part of the West.  As besnook explained, Japan sought to imitate the West after the US forced it open to protect itself from colonization by the West.  The success of this ploy led to a national feeling of superiority over other Asian nations who had not been able to escape this fate (along with some historical racial remnants and scars from previous encounters).  The history of its conquest of Korea and Manchuria and its invasion of China proper is owed both to this and to its reliance on the West, particularly the US and Britain, who encouraged the conquest which began Japan's long march toward Imperialism ending tragically with the Pacific War. That Japan has benefited from trade does not mean that is why it emulated the West.

Japan is a homogeneous society by nature (note the long periods of isolation before 1853) and this has been encouraged into the post-war period by its economic success.  This is either a problem or not depending on if you are a foreigner or Japanese but it brings a certain amount of resentment from the Japanese for a foreigner to point this, or any, fault out on the assumption that it is not for you to judge.

You forget, perhaps, that in the 1980s American corporations and government were fearful of a too dominant Japan.  In the 90s, books like Agents of Influence talked about the massive influence of Japan money on American institutions and government (so much for their lack of lobbying efforts). At the same time, books were written in Japan like Ozawa's Blueprint for a New Japan which advocated stripping power from the Japanese bureaucracy and creating a "more equal" relationship between the US and Japan and mending ties with a growing China (a precursor for the 2009 DPJ manifesto).  There has never in the history of Japan/US relations really been complete amity between the US and Japan and you shouldn't make that assumption.

As for FDI in Japan, it has only really been an issue in the past few years.  But, from the standpoint of the Japanese, they do not like the idea of non-Japanese handling their money (given the experience of the past few years, who could blame them) or insurance or any number of services and industries that they feel are uniquely Japanese by nature (for instance, there are no real restrictions on American autos in Japan, but few Japanese would buy one although they will buy European luxury autos).  That said, there are few manufacturing industries which foreign investors would want to own in Japan given the high cost of labor, taxes, and regulations.  The primary interests of foreign investors are the $15+ trillion in household savings of which the Japanese are especially protective.

Your assumptions about Japan lack historical and cultural perspective.  Japan can not be judged from a Western perspective as it will always be lacking in the eyes of the Western analyst.

Sun, 12/16/2012 - 18:58 | Link to Comment Orly
Orly's picture

An excellent discussion, you guys.

:D

Sun, 12/16/2012 - 17:37 | Link to Comment Marc To Market
Marc To Market's picture

1.  I do not see the Japanese position being dictated by the US.  Ishihara, for example, has long advocated a stronger and more militarized Japan.  Agreed that the US has for some time, wanted several of its allies, including Japan, to have stronger military presence.  Japan's policy is changing due to its own internal dynamics.  

2.  It is true that China is Japan's largest trading partner.  Yet, I do not see that as holding Japan back from confronting China over the disputed territory.  I read the course of events to suggest the timing of the flare up between the two was prompted by Japan "nationalizing" the islands.  

3.  Let's be clear.  There is an important difference (for investors and policy makers) between trying to force an over-valued currency lower and maintaining a under-valued currency.  

4.  China is not forcing Japan to chose between the east and west.   I am not sure I even know what that means.  The rise of China as a neighborhood bully is scaring other countries besides Japan.  I note that the Philippines for example have endorsed the remilitarization of Japan to help blunt the rise of China.  This reversal of historic proportions like the Polish foreign minister who claimed German inaction was a bigger threat than German action.  There is no choice between the east and west for Japan.  Neither one is homogenous or a bloc that can be joined.  It remains a firm ally of the US, while located in the Pacific.  It depends on open sea lanes.  Its relationship with many countries in the northern Asia remain strained.  

Sun, 12/16/2012 - 19:48 | Link to Comment besnook
besnook's picture

in order to understand the japan's foreign relations mindset vis a vis the west one has to go all the way back to the closed door policy dating back to the 1600s when the japanese kicked out the portuguese and spanish because the shogunate feared their influence would interfere with the uniting of japan under one shogun. the target was the growing influence of christianity seen by the japanese as a means by which portugal and spain would gain undue influence upon japan. only the dutch east indies company was allowed to stay under strict regulations because they did not use missionaries to convert the japanese to christianity.nagasaki was and still is the center of japanese christian worship making the a-bombing of nagasaki kind of ironic.

when perry arrived and opened the trade doors in 1854 under direct threat of force the japanese adopted the european empire model as a means to protect itself, not wanting to become another china. ww2 was a direct result of the success of the japanese european style expansionist policy. it was only the period after ww2 that japan embraced the usa and the west in large part because the japanese felt a debt was owed to the usa(general mcarthur specifically) for the preservation of japan as a sovereign nation and culture. as early as 1960, when the japan/usa security pact was renewed, opposition to the usa alliance was registered in large protests. huge demonstrations occurred in 1970 protesting the automatic renewal of the pact. the students who participated in the 1970 demonstrations run the .gov of japan today. in 2009, prime minister hatoyama published a manifesto calling for less emphasis on the west economically and politically and more emphasis on their own region of the world(china). his first move was to sompel the usa to move it's bases out of okinawa and downsize their presence in the rest of japan. the usa responded with intense political and economic pressure and won the argument forcing hatoyama to resign. abe and the ldp have effectively coopted hatoyama's manifesto which is why the ldp regained power.

the usa needs japan and korea(korea is also making noises about kicking the usa military out) strategically and economically. both japan and korea see their future tied to china economically and politically. the chinese would love to have them both. they are the key to the success of china's quest for a regional east and southest asian economic zone. they are hardly bullies but that does not mean the local countries won't protect their sovereignity from chinese dominance. frankly, no one gives much of a damn about the phillipines except that it provides a strategic point of influence and a place to test the usa's influence in the pacific. this brings us to the senkaku islands dispute. according to the aformentioned security treaty the usa is obligated to help japan defend those islands. china's strategy is to show japan that they cannot depend upon the usa to help them defend the islands so they don't need the usa military umbrella. this may be part of the more assertive position abe has taken on an independent japanese military. the entire incident is a test of obama's recent proclamation to refocus on usa influence in the pacific. the remilitarization of japan is strictly a sovereign state issue. it is not to provide abulwark against the rise of china in service of the usa. japan already has the 5th largest military in the world.

japan has already signed an agreement to lay the groundwork for yuan/yen trade with china and has agreed in principle with most of the pacific nations and china to set up the groundwork for a regional economic zone using local currencies.

Sun, 12/16/2012 - 14:51 | Link to Comment suteibu
suteibu's picture

"china is squeezing japan to make a choice between the west and the east. ironically, it is china pushing for an asia greater prosperity sphere and japan is resisting because of the close ties to the usa. japan is the knot in the middle of the rope in a tug of war. hatoyama laid out the plan several years ago to focus more on asia and less on the west but that dramatic change has to be managed slowly."

Excellent analysis which, sadly, most Japanese do not consider. 

Sun, 12/16/2012 - 14:39 | Link to Comment besnook
besnook's picture

i think what is missing from every analysis of japan's monetary policy is lack of discussion on japan's trade relationship with china. the focus is on the territorial disputes but i think the conflict goes way beyond the media info available on the issue. china is squeezing japan to make a choice between the west and the east. ironically, it is china pushing for an asia greater prosperity sphere and japan is resisting because of the close ties to the usa. japan is the knot in the middle of the rope in a tug of war. hatoyama laid out the plan several years ago to focus more on asia and less on the west but that dramatic change has to be managed slowly. china is japan's top trading partner and would love to conduct all trade with japan in yuan/yen which is critical to the adoption of the yuan as a world currency. the dispute over the islands and their surrounding petro deposits is being used as leverage to get the ball rolling. meanwhile the usa and euro economies must be supported for a few more years before any break with the west can be achieved with minimal impact on china and japan. a western collapse, however will be the cover japan needs to break with the west. so, in the meantime, japan devalues the yen to appease the fed while it improves their current account with china and sets up the conditions for an asia greater prosperity sphere, not in the way japan proposed at the turn of the last century but perhaps successfully accomplished this time.

Mon, 12/17/2012 - 00:52 | Link to Comment lasvegaspersona
lasvegaspersona's picture

besnook

interesting analysis. Japan is our largest client state and is completely dependent upon the dollar....at least as much as any country they will suffer with the fall of the dollar....and they must see this.

A move to China would be in their interest as the USA fails to give them the support in trade and military protection (that will happen with the failure of the currency.) It would be a huge change in a relationship which was forged in the horrors of war and both sides would have to deal with memories of Nanjing and other bloody episodes. Maybe, as the last of the living who can tell the tale die, there could emerge a new understanding. Memory failure is not a trait of either of these people however.

Sun, 12/16/2012 - 14:27 | Link to Comment suteibu
suteibu's picture

"Facing territorial disputes with China (among others) and North Korean missile development, the LDP advocate amending its pacifist constitution."

This is the common media response even before the election.  What is not reported to provide some balance and historic perspective is that the US has been pressuring Japan to rescind Article 9 (the peace part of the peace constitution) so that Japan can join America in its wars since the Korean War. 

Ironically, this puts the US in an uncomfortable position as it really does not want to see an increase in tensions between its security partner Japan and its economic partner China in which the US will have to choose sides.  So, America finally gets what it wants and, like a dog catching a car, doesn't know what to do with it.

Sun, 12/16/2012 - 19:04 | Link to Comment boogerbently
boogerbently's picture

Choose your battles. (See Falkland Islands.)

Was it really worth it?

Japan needs to give China the island, backroom deal, for a price.....

N. Korea needs to be vaporized, they cost the world more than they contribute to it.

 

Mon, 12/17/2012 - 00:42 | Link to Comment lasvegaspersona
lasvegaspersona's picture

I suspect that North Korea is such an excellent pawn for both the USA and China that both sides wish to keep it in play. It makes a wonderful bogeyman and provides needed international tension to keep all the military forces content.

If NK were pacified we would have to leave SK and would have no excuse to have such a large presense in our 'trading partner' China's backyard.

Similar to the dynamic of keeping Iran in play....we keep the Saudis dependent and have a great reason for huge presense in the ME.

Las Malvinas? Neither the UK nor Argentina want that problem resolved. Argentina uses it to stir up the masses with patriotic fervor as it screws the public with monetary mischief. The UK must get something out of that sheep infested rock....not really sure what but probably a useful call to national pride and to stoke memories of empire.

Sun, 12/16/2012 - 14:21 | Link to Comment JamesBond
JamesBond's picture

you can't keep a good 'abe' down...

unless he continues his poking of the china hornet nest, of course.

 

jb

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