Shaw Capital Management Investment Deadlock for Japan

The Democratic Party of Japan’s (DPJ) landslide victory

in the Lower House election a year ago ushered in

euphoric predictions of bold new policies, and even a

transformation of the Japanese political system.

There were widespread hopes that the DPJ would end

the run of short-lived leaders. Instead, Prime Minister

Yukio Hatoyama’s tenure proved to be a slow-motion

train wreck. Indeed, the DPJ quickly showed itself to

be no more competent in governing Japan than its

much-derided opponent, the Liberal Democratic Party

(LDP).

After shedding its two albatrosses of Hatoyama and

general secretary Ichiro Ozawa, and many of its earlier

campaign pledges, the DPJ hoped for a respectable

showing in the last Upper House election. Instead, the

ruling DPJ suffered a stunning defeat, when voters had

the opportunity to show whether they were confident

in Prime Minister Naoto Kan’s just over 1-month-old

administration.

The party ended with only 106 seats, far short of the

122 needed for an outright majority. The gap is too

large to be filled by creating a coalition, because the

most likely potential partners also lost seats.

As a result, the DPJ coalition can no longer ensure

approval of its legislative initiatives.

A twisted parliament portends even greater legislative

stalemate and political gridlock. Gerald Curtis, a

professor at Columbia University in New York and a

long-time expert on Japanese politics, said the election

had returned Japan to the paralysis and gridlock of the

past few years. “You cannot pass a budget now in this

political environment. You’ll have weak and unstable

government. While the world changes fast, the Japanese

government will change very slowly”.

Trying to put a good face on the results, Kan said he

viewed the election as a “starting point” for his push

for a more responsible government ...

The policy implications of the election outcome do not

suggest an aggressive approach to monetary, fiscal or

structural policy over the next few months.

Indeed, the attention of the large parties will most

likely be focused on internal matters, leaving less time

for focus on the economy.

Gridlock is bad for the economy and for investor

sentiment if policy drift continues for a prolonged

period.

According to Alan Feldman, managing director at

Morgan Stanley in Tokyo, there are so many pressing

problems in the Japanese economy that the costs of

gridlock could be very high.

In particular, pressure on the Bank of Japan for more

aggressive monetary policy will likely be minimal, at

least until political disarray ends.

Without strong political leadership little progress is

likely on budget priorities.

The same goes for tax decisions.

At Shaw Capital Management we give you the information and insight you need to make the right investment choices.