Well, since it is a very hot Sunday here in Barcelona, I am going to try and keep cool by live-blogging the Japanese elections. JEW's in-house political analyst Manuel Alvarez of Election Resources on the Internet will also be updating his Global Economy Matters Post as events unfold.
Apart from all the heat - and as Claus indicates in his last post here - these elections come at an especially tricky time for everyone. In the first place, and as the Economist indicates here, an elderly Japan may now be suffering from reform fatigue. The loss of all those pension records means that the Japanese electorate are now in no mood to receive yet another pension reform which downgrades the payout which they can expect to receive after all those years of contributions, although this is all that, even under the best case scenario, what can be expected. As the Economist notes, the young are voting with their feet:
"Can a working population support such a number of future retirees? Today's younger workers appear not to think so. Two-fifths of them are not paying contributions towards the fixed portion of their state pension scheme (current contributions fund present, not future retirees), suggesting they don't believe that the scheme will be viable when they retire. And they may be right."
This is a very clear example of a "self-fulfilling expectations" process, if you don't think something can work you pull out, and as a result the thing certainly can't work.
A second issue which is looming on the horizon is the August decision from the BoJ on whether or not to raise interest rates another quarter percentage point. Personally I had been growing rather skeptical about whether the BoJ would be able to live up to market expectations here, but if this election turns into the rout for Abe that many people are expecting it is hard to see the poor old BoJ soldiering on regardless, and keep a clear head whilst all around them are busy losing theirs.
But losing your head (metaphorically speaking) is one thing, and losing your shirt is another. Which brings me to my third point. As AJP Taylor liked to point out, history is often nothing more than the sum total of a sequence of minor accidents, and on this occasion the governing structure may not be railway timetables but rather stock market opening hours. Tokyo, as luck would have it, needs to lead off tomorrow with the global response to last Friday's drubbing on Wall Street. Right lads, best foot forward now......
The caption-photo I have posted above in fact depicts Tokyo Electric Power Co. President Tsunehisa Katsumata (2nd R) bowing in the company of various other assembled energy sector worthies after Economy, Trade and Industry Minister Akira Amari ordered the Japan's 11 nuclear power utilities to carry out strict checks on safety in accordance with new guidelines already laid down last year. In other words they had just received a giant ticking off following an earthquake. Somehow this is how I picture the LDP leadership at the present moment, bowing under the weight - or seismic impact - of the Japanese electoral verdict. Or maybe this just gives us an idea of the direction their collective eyes will instinctively move the moment someone asks who exactly would like to take responsibility for the debacle.
08:15 GMT
Well, the initial exit poll results are due in at around 12:00 GMT, so we haven't long to go now. This piece from AFP more or less sums up the atmosphere as we approach the starting block:
Japan voted Sunday in an election predicted to deliver a stinging rebuke to outspoken conservative Prime Minister Shinzo Abe and possibly pressure him to quit.
Abe, who has championed building a more assertive nation proud of its past, has come under fire over a raft of scandals including the government's mismanagement of the pension system.
Opinion polls predict that Abe's Liberal Democratic Party, which has ruled Japan almost continuously since 1955, could suffer one of its worst drubbings ever.
"Today may be a fateful day for Japanese politics," the best-selling Yomiuri Shimbun wrote.
08:50 GMT
AP have another useful background article here. Among other interesting points their writer makes is the idea that the LDP has been trying to do some last minute clawing back of popularity - their rating in the latest polls, released Friday, of respondents in a Kyodo News agency survey showed that those who favor Abe's party edged up to 21.5 percent of the total from an earlier 18.3 percent. But here the important thing is not so much the "what" as the "how":
The disapproval rate for Abe rose slightly to 59.7 percent, a record, from 58.8 percent... Hoping to stem that trend, Abe and other party leaders have been retreating from current policy issues to the safer ground of appealing to voters' general fear of change and the unknown. And with memories of Japan's decade-long stagnation of the 1990s still fresh, they were focusing on holding on to the economic status quo.
This is in fact the key issue. If Japan's political leaders shift gear coming out of the elections from reform to maintaining the status quo, then what happens next?
10:00 GMT
Still awaiting initial indications, but I came across some memorable quotes in this AFP article:
Opinion polls predict that Abe's Liberal Democratic Party, which has ruled Japan almost continuously since 1955, could suffer one of its worst drubbings ever, potentially bringing a new era of political chaos.
A defeat would not automatically oust Abe as his Liberal Democrat-led coalition enjoys a large majority in the more powerful lower house inherited from Koizumi. Prime ministers have traditionally quit to take responsibility for defeats in upper house polls, but Abe has no clear successor and his aides have insisted he is not considering resignation.
The opposition Democratic Party has campaigned among rural voters disgruntled with Koizumi's free-market reforms, saying that Japan's vaunted economic recovery has only benefited big cities.
FT Deutschland make a similar point:
The public works budget - one of the main ways of providing money and jobs to the provinces - has been slashed. Mr Tamura says that, over the past few years, spending on construction in Kochi has been cut by two-thirds, dragging down many of the prefecture's building companies. Public works are not just make-work schemes, he insists, but are needed to maintain roads and defences against the heavy rains that threaten Kochi's isolated mountain communities.
So the first things to note will be:
i) Just how bad the defeat actually is.
ii) Just how long, and with what measure of success, Abe actually manages to cling on in there
iii) How the financial markets respond to (ii)
12:20 GMT
Well the first exit poll results are now out, and they give us some sort of order of magnitude reading on (i) above:
Japan's ruling party suffered a major loss in parliamentary elections on Sunday, while the leading opposition party made huge gains, according to exit polls broadcast by Japanese television networks.....According to NTV, a major commercial network, the ruling Liberal Democratic Party was set to win only 38 seats, compared with 59 for the main opposition Democratic Party of Japan. The network based its forecast on exit polls broadcast shortly after the voting ended Sunday night.
So now we await confirmation and initial reaction.
13.30 GMT
Well the English language Japanese isn't exactly quick of the starting blocks here, but Reuters, AFP and AP have it coming in thick and fast. This piece from Reuters writer Linda Seig has some early initial comment:
Private broadcaster TV Asahi said the ruling camp was set to win only 46 seats, with the LDP winning only 38 of these. LDP senior executive Nobuteru Ishihara refused to be drawn on whether Abe should resign. "All the media exit polls are showing severe results. We are watching," he told reporters......Abe's allies have said he need not step down after a coalition loss, but analysts said he would be pushed to quit. "It confirms the worst expectations for the LDP. It is a very clear vote of no confidence," said Koichi Nakano, a political science professor at Sophia University in Tokyo. "I don't think he can continue as leader." Some, however, said Abe might try to cling to power. "Abe might stay, at least for a while, but there will be criticism, definitely," said Martin Schulz, a senior researcher at Fujitsu Research Institute. "He will get a lot of pressure."
So the most probable outcome would seem to be no early resignation, and a tug-of-war battle to try and stay on, in which case the financial markets will undoubtedly have their say.
It may be worth noting at this point that only half of the 242 seats are up for election, and that the LDP is in alliance with New Komeito, and that between them, to retain the government majority, they need to ensure themselves of 64 seats, something which seems well beyond their collective grasp at this point in time.
14:00 GMT
Ken Worsley from Japan Economy News draws attention in comments to the low turnout level and the fact that absentee ballots went over 10 million for the first time ever.
Just before polling closed, turnout was 0.5 per cent down on the 39.9 per cent seen in a similar poll held in June 2004.
Also, AFP is now informing us that Abe insists he is staying:
Japanese Prime Minister Shinzo Abe said Sunday that he did not plan to resign despite a crushing election defeat, as quoted by domestic media. Asked outside his office whether he planned to stay in charge, Abe said, "Yes," Jiji Press reported.Officials in his ruling Liberal Democratic Party said Abe did not see the election defeat as a rejection of his signature policy goals, such as the rewriting of the country's pacifist constitution.
"I don't think people have judged that Prime Minister Abe's policies have failed or have rejected his basic directions, such as enhancing economic growth, decentralisation and the national debate over the constitution," said secretary general Hidenao Nakagawa.
Basically this is what I both expected and feared. I fear this, not because I am either pro- or anti-Abe (I am but a mere economist in all of this), but because with the delicate background we have out there in global markets, several weeks of arguing and uncertainty in Japan are the last thing we all need right now. In this Bloomberg article, one Don Alexander, director of fixed income in New York at Citigroup Global Wealth Management, is cited as saying that:
The election will have ``limited impact'' on investors, who are more concerned about the unwinding of the yen carry trade and the timing of a rise in interest rates by the Bank of Japan since ``Credit events are more critical now,'' he said. ``Any unwinding of carry trades would have more impact than the election.'' Citigroup expects the interest rate rise to come in August or September, he said.
Now with all due respect, this is to put things the wrong way round, since, given that rate rise decisions really are in the balance at this point, the election result can precisely act as an influence on the decision whether or not to raise. So basically, the possible unwinding of the carry trade (which I don't really see, but still) depends on how the election is resolved, so market participants are *condemned* to follow this election, and since uncertainty about the outcome will only lead (in the minds of those who are given to this view) to uncertainty about a possible carry trade unwinding, what we could see is even more volatility in the coming weeks, which I think is precisely what emerging markets do not need right now. I hope I am not being too obtuse.
14:30 GMT
And of course Linda Sieg of Reuters implicitly responds to Abe, and ups the anti, just what we need!
Japanese Prime Minister Shinzo Abe's conservative ruling camp suffered a devastating defeat in upper house elections on Sunday, a result that could well force him from office and paralyze policy-making.
So here we have it, Japan could well be "paralysed". Is that a promise, a prediction, or a threat. I don't know. Meantime back at basecamp, Hidenao Nakagawa, is unruffled. It was a "complete" defeat, but on we go:
"If the outcome is in line with projections, it was a complete defeat," Hidenao Nakagawa, the LDP's secretary-general, told reporters. But he added that he wanted Abe to stay.
AP's Hans Greimel also rubs it in:
"Prime Minister Shinzo Abe's ruling party suffered humiliating losses in parliamentary elections Sunday after a string of political scandals, exit polls showed, but Abe said he did not plan to resign."
"Humiliating", it will be remembered, still has a rather special connotation in the context of Japanese society.
And now Abe has appeared on TV:
Abe told Asahi TV in a live television interview from his party's headquarters that he intends to stay on despite the disappointing results. "We tried our best and felt we made some progress, so the results are extremely disappointing," he said. "I must push ahead with reforms and continue to fulfill my responsibilities as prime minister." Kyodo reported that the party's No. 2 official may resign to take responsibility.
and now its AFP's Shaun Tandon's turn:
Japanese Prime Minister Shinzo Abe's government suffered a crushing defeat in upper house elections Sunday but the conservative leader insisted he would stay in power. Exit polls said that Abe's Liberal Democratic Party, which has ruled Japan almost continuously since 1955, was set to suffer one of the worst drubbings in its history, meaning a rocky road ahead for the hawkish premier's agenda.
So this time the defeat is "crushing" (I can just see them cringing there inside LDP headquarters) and we have a "rocky road ahead". That should help keep everything nice and calm over the next week or so.
15:10 GMT
Ken Worsley is back in comments again to inform us that NHK news is now projecting the LDP with 36 seats, while LDP heavyweight and Upper House Party Chief Katayama looks set to lose his seat:
LDP Upper House Party Chief KatayamaToranosuke Katayama, secretary general of the upper house caucus of the ruling Liberal Democratic Party, is set to be defeated in Sunday's election, Kyodo News projects. Katayama, 71, was seeking a fourth term in the House of Councillors and contesting a seat in the Okayama prefectural district where he faced a major challenge from Yumiko Himei, a 48-year-old rookie fielded by the main opposition Democratic Party of Japan. Katayama was first elected to the Diet in 1989 and served in the Cabinet as minister of public management, home affairs, posts and telecommunications from 2000 till 2003.
15:15 GMT
Well here comes the first of the casualties that the venerable Don Alexander (see above) was telling us would not be of interest to investors, the proposed increase in sales tax looks set to be scrapped. Of course, you will tell me how they are going to start to address that huge government debt if they go down this road (perhaps I should republish on this site what I have just written on Credit Rating Agencies and Italy's back-peddling on pension reform). Is there a lesson from all of this? Yes, if your society is still young enough get your house in order now, do something about it before you start to run into all these kind of problems:
Big defeat for ruling camp likely to make hike in sales tax difficult
TOKYO, July 29 KYODO
A projected major defeat for the ruling coalition in Sunday's upper house election is expected to make it difficult for the government to raise the consumption tax in the near future and to promote farm trade liberalization. Since taking office last September, Prime Minister Shinzo Abe has said the government will start full discussions on tax reform from this fall. Shortly before the start of campaigning for the House of Councillors election, Abe hinted at the possibility of raising the consumption tax from the current 5 percent. But he later downplayed the remarks and did not express a clear position on the issue during election campaigning.
15:30 GMT
Voter turnout stood at only 44.82 percent as of 7:30 p.m., down 1.02 percentage points from the corresponding time in the previous upper house election in 2004, according to the Ministry of Internal Affairs and Communications and as reported by Kyodo.
17:40 GMT
As of 1:20 a.m. Monday (Japanese time), Kyodo is reporting that the LDP has 82 assured seats, including 46 that were uncontested this time (which means that so far today they have 36), in the 242-seat upper house, while the DPJ is assured of becoming the largest party in the chamber with 108 seats, compared with the 81 it held before the election.
There is also some more reporting of Abe commentaries:
"Our nation building has just begun,'' he said in one of the programs. ''I would like to continue to fulfill my responsibility as prime minister.''
There is also a change in the turnout predictions:
Voter turnout in Sunday's House of Councillors election as of 1:30 a.m. Monday was estimated at 58.61 percent, up roughly 2 percentage points from the previous upper house election in July 2004, according to Kyodo News projections.
19:00 GMT
Kyodo have now given the final turnout result. Also there appears to be one seat left to be declared and the LDP now have 37.
The final voter turnout in Sunday's House of Councillors election came to 58.64 percent for the prefectural constituency section, up 2.07 percentage points from the previous upper house election in July 2004, according to the election management committees of the nation's 47 prefectures. It is the sixth consecutive time that voter turnout in the upper house election has fallen below the 60-percent level. An upper house election is held once every three years.
20:30 GMT
David Pilling of the Financial Times has an election round up. Perhaps the most interesting quote I have seen all day is this one from Nobutero Ishihara, deputy secretary-general. Ishihara said Mr Abe was not dircetly to blame for the defeat since:
“It just so happened that Abe was the helm of the government” when the pension scandal hit, he said. “We had to devote half our speeches to this issue, meaning we were constantly on the defence. I’ve never seen anything like it.”
This seems to me to be a very relevant point. A significant part of this whole situation has to do with pensions, and the natural unease of Japanese people before a very uncertain future on this front. The hard bit is, at this stage in the game I'm really not that sure what anyone can do about this. Not the lost documents, but the much bigger issue of guaranteeing people what they would consider to be a "fair" pension.
OK, well that's it. I'm shutting up for now tonight. I will be back tomorrow to see how the markets react to all this though.
Monday 30 July: 08:00 GMT
Kyodo now has a final breakdown of the results. The LDP took 37, and New Komeito 9, which gives them a combined total of 46. The DPJ took 60.
These elections were, of course, only for half the seats. So the LDP now has a total of 83 and New Komeito 20, making a combined total of 103. DPJ now has 109. So noone has an overall outright majority, and it will all be down to pacts and agreements with independents and others I suppose.
But as all the commentaries are emphasising, the elections really aren't about political control, they are about credibility, and support for reform policies, and on that count Abe and LDP have lost out mightily.
Kyodo also reports that the LDP board has met and confirmed that (for the time being) Abe will be staying on. The Japanese press, naturally enough, don't quite see eye-to-eye with the LDP board on this:
Two of Japan's four nationally circulated newspapers have called on Prime Minister Shinzo Abe to dissolve the lower house for a general election in their Monday editorials. The calls by the Mainichi and the Nikkei follow the ruling Liberal Democratic Party's devastating defeat in Sunday's election. The Asahi Shimbun newspaper urged Abe to step down, and the Yomiuri Shimbun said the prime minister needs to rework the way he runs the government while exploring the possibility of cooperating with the Democratic Party of Japan.
The English language version of Asahi offers their analysis of what went wrong for Abe, and of course pensions loom large:
The crushing defeat that voters handed to Prime Minister Shinzo Abe and his Liberal Democratic Party on Sunday demonstrated the degree to which Abe and company are out of touch with the public. Before the July 12 start of the Upper House campaign, Abe said he would make constitutional revision the core issue of the election. During speeches for LDP candidates, Abe stressed the fact that his administration had passed into law legislation for a national referendum that was the first procedural step toward constitutional revision. He also pointed with pride to the revision of the Fundamental Law of Education, the first such amendment since its enactment in 1947. The fundamental law's revision heralded the possibility of revision of the Constitution. However, voters on Sunday were obviously far more concerned with bread-and-butter issues that directly affect their daily lives. Key among those issues was concern about the state of the public pension system. Even though the government passed legislation to reorganize the scandal-tainted Social Insurance Agency, the public was clearly not convinced that everything had been done to address their concerns about 50 million or so missing pension accounts or whether the new entity would operate in an efficient manner that would ease their fears about retirement.
Asahi also indicates that all those ideas of constitutional reform are now more or less dead in their tracks.
Another topic which does seem to be coming out in the elections is the growing disparity between Tokyo and many of Japan's regions. This disparity has a significant demographic underpin, as younger more educated Japanese are pulled in by the attraction of better jobs and higher wages in the capital, leaving a rather older and poorer population in the provinces. The Japan Times has a piece on the Kansai region which to some extent reflects this:
Voters in the Kansai region went to the polls Sunday with not only the pension scandal on their minds but also the growing disparity between rich and poor.
Reaction on the Japanese stock market has been mixed, after last weeks sharp decline. The Nikkei 225 Stock Average initially fell 1.4% but then recovered to end fractionally up on the day, while The Topix was up 0.4% at the close of trading after a 1.4% slide at the start. This performance was in part the result of some strong profit numbers from Japanese companies (especially in steel) and better than expected industrial output numbers for June. According to the METI:
Industrial Production in June increased 1.2% from the previous month, showing a increase for the first time in four months. It showed an increase of 1.0% from the previous year. The index in June was 108.4 (seasonally adjusted). Industries that mainly contributed to the increase are as follows: 1. Electronic parts and devices, 2. Transport equipment, 3. Information and communication electronics equipment, in that order.
Now if we look at the chart I prepared in connection with the May industrial production numbers, we will see that while the 108.4 reading is a decided improvement in the fall of the last few months, the level is still significantly down on the very good Q4 2006 performance. So while this data will obviously influence BoJ thinking to some extent, it is evidently far from decisive.
At this point in time the Asian stock markets seem more focused on the US situation and the ongoing story of the sub-prime mortgage market:
Japanese investors seemed shrug off a big setback for the ruling coalition in Sunday's parliamentary elections, focusing instead on the uncertain outlook for the U.S. market.
So now we move on to see just what the level of political fallout will be in Japan over the coming days, whether the pressure on Abe to go will mount or subside, and just what the policy impact of yesterdays vote will be on the current Japanese government.
31 July
Well the campaign for Abe to go has started to gather a little momentum. Asahi has an article today by their political news editor under the header "Voters send Abe message: Resign" which notes the following:
Abe's focus on issues with a strong conservative bent distanced the prime minister from voters more interested in issues closer to home. These voters recognized the huge gap with Abe on what the government's priorities should be. While there have been examples in the West of neoliberalism and neoconservatism co-existing within the same government, the Abe administration failed to find a proper balance between the two schools of thought.
They also publish the findings of an exit poll conducted on Sunday showing that 56% of those questioned thought Abe should go. I guess the interesting point to watch will be whether this figure goes up in the coming days. This is especially the case since it really isn't clear where, policy wise, Abe can go from here. At the present point in time Abe is simply considering a cabinet reshuffle.
At the present time the main threat to Abe would seem to come from divisions within the LDPs own ranks, divisions which may become even more pronounced if the policy balancing act lurches one way or another. The Financial Times has an article documenting some of the disident voices. It also has a leader explaining why it doesn't consider the DPJ a serious opposition party:
Unfortunately, the DPJ does not look like the right party to usher in a period of genuine multi-party democracy for Japan. Formed only in 1998 out of a merger of four political groups, it lacks consistent policies, let alone an ideology. The party members include nationalists not unlike Mr Abe, economic liberals, leftists and various cast-offs from the LDP. Since it was founded, it has had six leaders.
These boundaries between "neo-conservatives" and "neo-liberals" seem to run right across the party frontier, as if each party really needed to have its quota to attract a broad enough voter base. It does turn the formulation of a policy programme to really address the important underlying issues facing Japan into one very big headache, at least IMHO.
The FT's David Pilling also piles it on (in subscription only unfortunately):
The image that will endure from Shinzo Abe’s first, and possibly last, national election campaign is not of the prime minister. Rather it is of Norihiko Akagi, his beleaguered farm minister, who mysteriously appeared in front of an astounded press with giant bandages stuck all over his face. Mr Akagi, who is at the centre of the latest dirty-money scandal to eat at the Abe administration’s credibility, refused to reveal what had happened to his face or even to admit anything was wrong. “Don’t worry about it,” was all he had to say.
Meantime on the economic data front the unemployment number continues to fall, now standing at 3.7%. (and here). Average aggregate wages however continue their steady decline, clocking up the seventh consecutive month in which they have fallen. Unsurprisingly consumption year on year is almost completely flat (a meagre 01.% increase over June 2006).
The Japanese stock markets seem to be holding more or less steady, while the rest of Asia is staging a recovery from last weeks sell-off, and, oh yes, the carry trade is once more alive and well in Australia and New Zealand.
