Photo: shibuya246 on flickr
Japan’s government is known for frequent turnover. Expect more of that in the wake of this current crisis, says Citi.Difficult path ahead for fiscal consolidation — In any case of possible political outcomes, 1) survival of the Kan administration, 2) the cabinet resignation, or 3) dissolution of the Lower House followed by a general election, we see little likelihood of a stable government forming or of solidarity among political forces that advocate fiscal consolidation. We therefore see increased risk of a downgrade to Japan’s sovereign debt rating.
Here’s a longer look at various outcomes, and their impact on markets:
We see three possible political outcomes: 1) survival of the Kan government, 2) resignation of the entire cabinet, or 3) dissolution of the Lower House followed by a general election. In any case, there are several options for potential governing coalition combinations. In our view, the stance of any new government towards an increase in the consumption tax and the stability of the administration are critical to gauging the impact on the JGB market. Progress in comprehensive reform of taxation and social welfare in order to achieve fiscal consolidation would impose more pain on the public the more dramatic the extent; this would be very difficult without strong political leadership. The best scenario for the JGB market would be if the Lower House were not dissolved, and the DPJ and LDP were to form a grand coalition or cooperate on policy. Based on the members currently holding seats, we would expect that a majority in both houses of the Diet would support an increase in the consumption tax. In contrast, the dissolution of the Lower House and a general election would pose the greatest risk for the JGB market. We would expect a general election to cause significant change in the relative strengths of parties in the Diet. We see the defeat of existing political parties and tax cuts as the two critical issues in the three elections in Nagoya—Aichi Prefecture governor, Nagoya mayor and Nagoya city council.
In a general election, regional political parties advocating tax cuts could well make big gains. If the DPJ loses seats, then the extent of the loss would be critical, in our view. If the party loses 50–100 seats, then the scenario outlined above would be most likely. If the loss was significantly higher than 100, however, then Your Party and regional parties would probably not be able to absorb them all, meaning the LDP could gain a majority in the Lower House. This would, in our view, heighten expectations of an increase in the consumption tax after the formation of a government led by LDP President Sadakazu Tanigaki. But the LDP is far from a majority in the Upper House. It would not hold a majority even in coalition with New Komeito, its most likely partner, and the New Komeito is not keen on a rise in the consumption tax. This could badly set back debate regarding integrated reform of social welfare and taxation that the Kan government has been proceeding with.
Business Insider Emails & Alerts
Site highlights each day to your inbox.