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Markets cheer Japan conservatives' return to power

Investors on Monday cheered after Japan's conservatives swept back to power in national elections, with promises of a fix for the economy and tougher diplomacy in a territorial spat with China.

world Updated: Dec 17, 2012 08:50 IST

Investors on Monday cheered after Japan's conservatives swept back to power in national elections, with promises of a fix for the economy and tougher diplomacy in a territorial spat with China.

Prime minister-in-waiting Shinzo Abe, the hawkish head of the Liberal Democratic Party, wasted no time in asserting sovereignty over disputed islands in the East China Sea, declaring them "Japan's inherent territory".

Abe, a one-time premier, also vowed to put Japan's moribund economy back on track after years of deflation, made worse by a soaring currency that has squeezed exporters.

Topping his agenda was a promise to pressure the Bank of Japan into more aggressive easing policies aimed at kickstarting growth as the world's third-largest economy slips into recession.

All eyes will be on the bank's policy meeting this week to see whether the nation's central bankers move in line with Abe's wishes.

Investors are increasingly betting on some action from the central bank, with the yen tumbling against the dollar and euro on Monday while Tokyo's Nikkei 225 stock index surged 1.62% at the open.

On Sunday, voters dumped Prime Minister Yoshihiko Noda three years after his Democratic Party of Japan (DPJ) promised a change from more than half a century of almost unbroken LDP rule. The result cost Noda his party leadership.

The rout was completed by news that the LDP and its junior coalition party New Komeito had secured a super majority in the lower house that will allow them to overrule the upper chamber.

"Control of two-thirds of lower house seats would alleviate concerns about divided control of the Diet's two chambers," brokerage giant Nomura said in a note.

"It is also likely to fuel expectations, particularly among foreign investors, of more expeditious policymaking."

Analysts, however, say the LDP's victory came by default, with voters disenchanted by the DPJ after three years of flip-flops, policy missteps and diplomatic drift, but having little faith in any of the alternatives.

With turnout at a record low and voters complaining of no real choice, even Abe acknowledged the result was not a ringing endorsement.

"This doesn't mean confidence in the LDP has been fully restored," Abe said after the vote.

"I think this result means a 'no' to the political confusion of the DPJ. People will be strictly watching if the LDP will be able to live up to expectations."

Public unease about a worsening security environment -- North Korea's mastering of rocket science last week, days before Beijing sent a plane into Japan's airspace -- bolstered Abe's campaign.

And he showed no signs of easing on his plan to press Beijing over their simmering territorial dispute.

"China is challenging the fact that (the islands) are Japan's inherent territory," he said. "Our objective is to stop the challenge. We don't intend to worsen relations between Japan and China."

Abe's offer to boost spending on infrastructure was standard fare from the LDP playbook, but chimed with voters in the northeast, where the devastation of the March 2011 tsunami is still evident.

His win stoked speculation that whoever is appointed to replace BoJ governor Masaaki Shirakawa next year will favour a more aggressive easing stance.

"Foreign investors are likely to remain bullish, betting that Mr. Abe will fulfil his promises to turn on the fiscal taps," Kenichi Kubo, senior fund manager at Tokio Marine Asset Management, told Dow Jones Newswires.

He is likely to "pressure the Bank of Japan into much more aggressive asset purchases to pull Japan out of recession and prolonged deflation".

However, Credit Agricole said in a note that "it is not obvious that coalition parties will be as welcoming" to Abe's aggressive policies.

Stephen Church, research partner at Japaninvest, added that Abe's previous tenure in Japan's top political job was scarred by unfulfilled promises.

"Expectations have built up that (he) will deliver on his policy pledges," Church said.

"(But) he has a record of not delivering."