• The Democratic Party of Japan (DPJ) as expected won a landslide victory in connection with yesterday’s Lower House election. DPJ won a solid majority in the Lower House, but fell short of a “supermajority” allowing it to overrule an Upper House Majority. Hence, DPJ will still be dependent on the support of a couple of smaller coalition partners in the Upper House.
  • Most importantly, the election had a clear-cut outcome and there is little danger Japan will end up in a political paralysis like in the 90s, when weak coalition governments probably contributed to prolonging the downturn. With fiscal stimulus already in place and the economy recovering there is no imminent need for major political decisions. In addition, the new DPJ government will probably get some tailwind from the economy as unemployment should start to decline in early 2010.
  • On the policy front a new DPJ government is more likely to ease fiscal policy further in 2010 primarily by boosting household disposable incomes. Hence we are likely to see less fiscal consolidation and a DPJ government is probably not good news for the bond market. While we are likely to see a DPJ government push for political and administrative reforms, we are unlikely to see it push for major economic liberalisations. On the contrary, some DPJ proposals like raising minimum wage could be regarded as steps in the wrong direction. Externally a DPJ government will be a significant boost for regional corporation within Asia.
  • There has been little market reaction this morning, as the outcome was as expected. The stock market and bond yields are slightly lower and JPY stronger mostly due to overall weaker stock markets in Asia this morning.