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World News

INSTANT VIEW: Japan PM calls poll as party at risk of defeat

TOKYO (Reuters) - Japanese cabinet members signed off on Prime Minister Taro Aso’s plan to dissolve parliament’s lower house on Tuesday for an expected August 30 election, as polls show his ruling party in danger of a historic defeat.

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KEY POINTS:

-- A victory for the opposition Democratic Party of Japan would end more than 50 years of almost unbroken rule by the conservative Liberal Democratic Party and raise the chances of breaking a political deadlock that has stymied policy implementation as Japan struggles to emerge from recession.

-- It would also usher in a government pledged to pay more heed to the interests of consumers than companies, to wrest control of policy from bureaucrats to cut waste, and to adopt a diplomatic stance less subservient to close ally the United States.

-- All ministers signed off on Aso’s plan, though there had been speculation that Finance Minister Kaoru Yosano might oppose it and either resign or force Aso to fire him.

COMMENTARY:

ATSUTO SAWAKAMI, FUND MANAGER, SAWAKAMI ASSET MANAGEMENT

“Both the DPJ and the LDP are made up of politicians. Both tend to think first on what can be done to shore up the economy over the short-term, instead of the kind of fundamental and broad measures that may be painful at first, but could steer Japan to a stronger economy over the next 20 years -- such as changes in the tax system.

“Japan’s problems are long-term -- the deficit, an aging population, pensions. They require politicians and policies with vision about the long-term and they have yet to appear.

For now, the political arena just doesn’t affect which stocks we pick. In that sense, I have absolutely no interest. We are looking at the kind of goods and services that will become more scarce over time, and have been looking at sectors such as energy, water and forestry.”

TAKAFUMI YAMAWAKI, SENIOR FIXED-INCOME STRATEGIST, BNP PARIBAS

“The current political situation suggests that the Democratic Party is very likely to win the election, and the bond market has already been moving with that outlook.

“The market will look closely at more debate from the DPJ on how much they will pledge to cut spending. If their pledges are perceived as an unrealistic way to compensate for their other planned spending, it would lead to the image of increasing debt issuance, a negative for the market.”

YUJI SAITO, HEAD OF FX SALES, SOCIETE GENERALE

“There are still uncertainties such as how the Democrats will fare in the election, whether there will be any political realignment and whether there will be a new coalition administration.

“The market would not like a political hiatus. If Japan’s stocks struggle because of political uncertainties, the dollar/yen and cross/yen will also likely face difficulty in rising.

“Hopes that the deadlock in parliament will be resolved are positive for the markets. But whichever party takes power, there will be a question how the government will secure funding.”

DAISUKE UNO, CHIEF STRATEGIST, SUMITOMO MITSUI BANKING CORP

“There will be 40 days between the parliamentary dissolution and a general election. That is much longer than an average of around 29 days, creating a political vacuum, which is negative for the Japanese stock market.

“If the Democratic party wins at the election, overseas investors will welcome a change in politics, which is likely to boost the yen.

“JGB bond yields are expected to fall as the Japanese economy is still stumbling, but the outcome of the election will have little impact on yields.”

AKIHIKO INOUE, CHIEF FIXED-INCOME STRATEGIST, MIZUHO INVESTORS SECURITIES

“The Democrats’ credibility has been confirmed by their good performance at the Tokyo Metropolitan assembly poll, so the question is by what margin can they win the election and whether they can secure a single majority in parliament. A win by the Democrats may be a positive as it will bring fresh faces to politics.

“At the same time, the Democrats may be at a peak right now and it will be up to them to keep up positive public expectations for the next month until August 30.

“The biggest concern is their funding policies, but it is an issue that any party which takes control will face given the current economic conditions. The bond market reaction will remain subdued until detailed policies are revealed by the new government.”

ROBERT FELDMAN, CHIEF ECONOMIST, MORGAN STANLEY

“From my viewpoint as an economist, this election is about productivity. Japanese are worried about the sustainability of their system, the sustainability of their living standards and in that context, they are looking for some changes in policy approach. They are looking for efficiency in government, and they seem skeptical that the LDP (ruling Liberal Democratic Party) will deliver that.

“Some of the ideas put forward by the Democrats already do work in that direction. Some don’t.

“What neither the Democrats nor the LDP has answered is how to reduce the deficit.”

NORITSUGU HIRAKAWA, STRATEGIST, OKASAN SECURITIES

“Now that parliament has been dissolved we have 40 days of a political vacuum and overseas investors may not like this very much -- they tend to be scared off by political instability. But this dissolution has been in the air for a while, and over the last week foreign investors have been net buyers of stocks more often than they’ve been net sellers, so this may not be much of a problem.

“I think that for the short-term, hope that the Democrats taking power will cure the parliamentary paralysis and lead to smooth passage of bills and policies will outweigh any worries about uncertainty. Over the longer term, there’s questions about how the Democrats will fund all their social programs, and this may eventually weigh on the market.

“But for now, the short-term message is that the market really wants change.”

MARKET REACTION:

-- The yen was steady at about 94.19 yen per dollar and 133.95 yen per euro.

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