In the upcoming Japanese election, the Liberal Democratic Party is poised to win with Shinzo Abe as the party leader. In Morgan Stanley’s analysis of the effects of different coalitions on Japanese policy and the Japanese economy, they consider two scenarios. 1) A big government coalition with the DPJ, or 2) a small-government coalition with the new “Third Force” parties.
In a news article today by Japan Today, Abe has announced that a coalition with the DPJ will not be considered. This leaves only scenario 2 from Morgan Stanley’s analysis, which has important implications on monetary policy for Japan moving forward. Scenario two calls for aggressive structural reform, in addition to aggressive BoJ action.In addition, unlike scenario 1 Abe wants to keep fiscal spending low and push aggregate supply outward through lowering corporate taxes and reducing business costs.
The result would likely be modest positive inflation, but much extra real growth.
Abe calls for unlimited monetary policy until the inflation target of 2% is hit. In the process, the Yen will weaken which will help make Japanese exports more appealing in the short term.