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.

http://www.japantoday.com/category/politics/view/abe-says-he-wont-consider-coaltion-with-dpj

Through the recent spillover reports, an important thing to take note of is the interdependence of China and Japan. They have a trading relationship of $340 billion/year. Japan is China’s largest investor and China is both Japan’s largest trading partner and financier.

Especially with the latest political dispute between Japan and China (senkaku/diaoyu islands), their relationship is becoming increasingly strained. Major Japanese companies like Toyota and Japanese Airlines have been hit hard in recent months and there is little sign that the dispute will be ending soon. S&P was recently quoted as saying that if it continues to worsen, “it may hurt Japan’s macro economy and affect the credit quality of rated Japanese companies on a large scale”.

This great interdependence would also leave Japan among the most vulnerable if another type of shock were to hit China. Although a low probability, China does show indicators of a real estate bubble. Would these types of shocks affect Japan in a similar way? If China’s shock was more economical than political, it would still be difficult for Japanese companies like Toyota and Japanese Airlines to grow in the China market. I suppose in the political situation, Japan could look to other areas of Asia to grow, but from the economic shock standpoint, a larger portion of the developing asian economy would be hit and would cause other parts of the world economy to be affected like commodity prices (metals) that are important in Japanese manufacturing.

IMF working paper and a World Socialist [Fourth International!] article on a statement on the economic impact by IMF Managing Director Christine Lagarde.

In real terms, the average monthly income per household is up 1.8% and average consumption expenditures per household are up .9% from the previous year. However, one area that elicits concern is the decrease in housing consumption by 8.5% in real terms. Is this just a slowing down effect from the aftermath of The Great East Earthquake reconstruction, or does this signal trouble for recovery? Accordingly, housing prices in both Tokyo and Osaka have fallen this past year.

The second largest drop in consumption was Education, which fell by 5.4% in real terms from the previous year. This may be more attributed to the aging population.

http://www.stat.go.jp/english/data/kakei/156.htm

http://www.nuwireinvestor.com/articles/japanese-land-prices-stable-house-prices-fall-59937.aspx

A recent article for Reuters has highlighted the surge in Japanese companies’ global M&A deals. If the proposed deal for Softbank to purchase Sprint Nextel Corp for $20 Billion is completed, Japanese companies will set a record for outbound acquisitions this year ($75 billion). Japanese firms have announced 14 outbound transactions worth at least $2 Billion each, which totals 5 more than the previous year.

From an economic paper by Arikawa Yasuhiro and Miyajima Hideaki (link below), they describe the causes and parallels for a mature economy to undergo a surge in M&A activity. They conclude that industries with higher growth opportunity are likely to engage in more M&A activity, but that the same is also true for industries facing negative fundamental shocks like sales declines.

Is this aggressive growth an indicator that Japanese CEO’s are becoming more confident in the future of the Japanese economy or is it the result of less confidence in domestic growth potential?

http://www.reuters.com/article/2012/10/15/us-japan-ma-outbound-idUSBRE89E1GF20121015

Click to access 07e042.pdf