Hot Topic – DPJ wins – Deep Pain Jammed LDP

The victory for The Democratic Party of Japan (DPJ) and their party leader Mr. Yukio Hatoyama is not a surprise. Though, after almost 50 years LDP government leadership of the second largest economy in the world, I certainly think the political change in Japan is a Hot Topic. This is a short view on what we can expect of political changes and what to watch out for as an investor and in corporate treasuries.

DPJ will surely try to outlive two headlines from their election campaign. One is to change the export dependent economy into a domestic demand economy. Second is to loosen the tight bands between the government and the large corporations. Let’s take the policy changes first.

1.      Children families will receive a monthly payment of Yen 26.000 ($275) per child.

2.      High road tolls will be scraped, a surcharge on gasoline will disappear and other car related taxes will be cut.

3.      Corporate tax for smaller firms will be lowered from 18% to 11%.

4.      DPJ will work for a higher minimum wage, up from the current Yen 700 to Yen 800 and later raised to Yen 1000.

5.      The new government wants to cut the 1990 gas emissions by 25% in 2020 and by 60% in 2050.

6.      Regarding public spending DPJ will cut what they call “waste” referring to al sort of non productive infrastructure projects the prior government used to spend money on.

Point 1 and 2 is fully aimed at low income families. This income group does in all countries tend to spend 100% of their disposal income, also in Japan. No doubt that it will increase consumption, many economists says it increases GDP with 0,6% in the fiscal year starting in April 2010.

To be honest, this has nothing with a reform to do nor a structural change of the big and long lasting issues there are to solve in Japan. This can not inspire any stock market anywhere. The next question is how to finance it ?

To cut useless projects within infrastructure makes sense, but it will just sponsor the new spending slightly. DPJ has no answer on this, and there is even the risk that markets gets tired of government spending packages – this risk should by the way not be understated.

Cutting taxes for the small enterprises only, when the corporate tax for large corporations is 40%, is a way to show distance to the large companies, as was DPJ’s second big campaign headline.

To raise minimum wages is a fight that many governments have lost. I would say that it is hard to increase salaries so much in a low growth environment. Though, it emphasizes DPJ’s wish to move towards more domestic demand.

Some environmentalists would probably question why DPJ favour more gasoline consuming traffic combined with high targets for emission cuts – doubtless a fair question.

Market implications

 DPJ’s Secretary-General Katsuya Okada (possible finance minister) has said that trying to move exchange rates artificially is undesirable in the long run. It means they will leave FX rates to the market unless the Yen exchange rate clearly is much to under- or overvalued. This is a direct consequence of moving away from the almost unlimited support to the export industry. Should USD trade below 90,00, then it won’t harm the new government.

Private investors once more will absorb the even higher public debt, but as mentioned before, more debt suddenly might be out of fashion. One important fact has changed over time. In the early 1990s Japans saving ratio was around 20, next year it is estimated to be 1,4, meaning less private savings to finance the public debt.

In the stock market I pay attention to segments that profit from the higher disposal income in families with children. These stock segments are low cost durable goods producers, low cost restaurant chains (they are also placed at the highways where the tolls are removed), nursing stuff to kids. Trucking companies will also benefit from highway tolls disappearing.

On the risk are clearly companies involved in infrastructure constructing, but there could also come new restrictions for consumer lenders and a higher tobacco tax might be in the cards.

Changes always create new opportunities like mentioned above. Honestly are the opportunities few and I think the biggest reason is, that after so many years of political miss management in Japan plus a global recession, then did LDP loose because of the deep pain – DPJ didn’t win by suggesting new ideas.

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