- Weak polls suggest hopes for a political change in Japan are fading
- The real risk is that Abe steps down, putting the future of 'Abenomics' into question
- Most likely outcome is a continuation of the status quo, with impact on yen likely to be limited
While Yuriko Koike’s Party of Hope was launched with much fanfare a few weeks ago, momentum behind the new party has run out of steam. Koike recently declined to leave her current role as the Governor of Tokyo, which would be required if she were to run in national elections. This has led to voter confusion, as the leadership behind the new party is unclear with Koike out of the picture.
Polls suggest the Party of Hope is unlikely to have a big impact
Unsurprisingly, the popularity of Party of Hope has been declining in recent polls. Looking at the latest NHK polls, the LDP party continues to lead (31.2% approval), while other competitors remain far behind. The Party of Hope has an approval rating of just 4.8%, while Komeito (LDP’s current allies) has a 3.8% approval rating. With the upcoming elections only a few weeks away, the likelihood of the Party of Hope forming a government is fairly slim.
The real risk is the continuation of Abenomics
As Abe has promised to resign if the combined LDP/Komeito Party coalition fails to retain a 233-seat majority, the real risk from the elections is that Abe will step down. Given Abe’s dovish views on the economy, this puts ‘Abenomics’ at risk. Despite speculation that Abe may be seeking to replace Kuroda in the near future, Abe has confirmed his faith in the current governor according to Japan Times. Specifically, he said that “I have full trust in Gov. Kuroda’s monetary policy”, in a comment to a House of Councilors Budget Committee meeting on January 30.
Other LDP candidates, such as Former Secretary General Ishiba (who is seen as the leading front runner to Abe), are far less dovish. If Abe steps down and is replaced by a more hawkish prime minister, expectations will grow that Kuroda will be replaced. This will lower expectations of future quantitative easing, in turn, leading to a stronger yen.
Yen now strengthening, with little help from Japanese politics
While the yen has broadly strengthened in the past few days, the impact from the elections has been mostly limited. Given the falling popularity of the Party of Hope and the rising popularity of the LDP, the status quo remains the safest bet. Instead, the yen is strengthening on external factors including US dollar weakness thanks to new doubts that Trump will be able to get his tax reforms through Congress. While a big political change in the near future can cause the yen to strengthen, our view is that any impact (even if Abe resigns) is likely to be limited to the short-term. While we can’t rule out any surprises, the continuation of the status quo remains the most likely outcome.