MNI ANALYSIS: Election, N. Korea Threat Dampen Japan Sentiment

--Survey Details Seen By MNI Reveal Growing Concerns

By Max Sato

     TOKYO (MNI) - The uncertainty created by Japan's snap election and the

lingering North Korean nuclear arms threat are clouding consumer and business

sentiment, Japanese government officials said Tuesday about the results of a key

government survey released Tuesday.

     Confidence among retailers and in the tourism sector tend to slump ahead of

national elections but comments made by those polled in the latest Economy

Watchers Survey indicate concerns are greater this time than during the last

Lower House elections three and five years ago, an examination of survey details

by MNI revealed.

     Unlike in late 2012, when voters expected change for the better after the

yen's appreciation had choked economic growth and political stalemate had hurt

sentiment, there seems to be greater uncertainty over the domestic and global

political outlook.

     The Economy Watchers outlook index showed sentiment regarding the next two

to three months marked the first month-on-month drop in two months on a

seasonally adjusted basis, slipping to 51.0 in September from 51.1 in August.

     "North Korea and the election are generating uncertainty. There were many

Watchers comments about an expected slowdown in the movement of people and goods

during the election campaign," said Cabinet Office director of regional

economies Shigeru Hirota.

     He said he could not immediately compare the current political uncertainty

ahead of the Oct. 22 vote with the periods before the previous Lower House

elections in 2014 and 2012.

     But MNI's examination of comments by survey respondents show fading

confidence in the government of Prime Minister Shinzo Abe, who returned to power

in a landslide win in late 2012 with the promise of correcting the yen's rise

and regaining Japan by a reflationary policy mix and more aggressive diplomacy.

     More than four years of large-scale monetary easing, increased fiscal

spending and planned structural reforms have failed to pull the economy

completely out of deflation and guide inflation to a stable 2%, which Abe had

said would be achieved quickly.

     "Consumer expectations for the government are becoming thinner. I expect

consumers to stay cautious about spending for a while and business conditions to

become tougher," said a book store owner in northern Japan.

     "The economic and fiscal policy minister told a news conference that the

current economic expansion appeared to have surpassed the second-longest

post-war stretch but we cannot feel it in the rural areas," said a

telecommunications firm owner north of Tokyo.

     A supermarket manager also said consumer confidence was expected to

deteriorate now that Prime Minister Abe declared he would go ahead with the plan

to raise the 8% sales tax to 10% in October 2019.

     In December 2014, Abe led the ruling coalition to a landslide victory in

early general election in the absence of strong opposition. In the previous

month, he decided to delay the second stage of the planned doubling of the sales

tax hike to 10% by 18 months until April 2017 and called a snap election to ask

for public support for shelving government plans to raise taxes to finance

growing social security costs.

     Since then he has again delayed the timing of the tax hike but is now

proposing  to use the planned 2019 tax increase to pay for free high school and

university education to eligible students from low-income families, a move that

could worsen uncertainty over the outlook public pensions and medical plans.

     Government officials have said concerns about the social security system

are causing households to save more and spend less.

     Leading up to the 2014 Lower House elections, those polled in the Watchers

Survey were more concerned about rising import costs amid the depreciation of

the yen as well as the lingering negative impact of the last sales tax hike in

March 2014.

     The number of Watchers' outlook comments on the North Korean risk increased

to 73 in September from 52 in August and just eight in July, as saber rattling

between the U.S. and North Korea continued over Pyongyang's threat of using

nuclear ballistic missiles.

     The uncertainty among Watchers over the domestic political climate appears

to be greater. The number of Watchers' outlook comments on Japan's election

jumped to 218 in September from two in August and three in July. Most believe

economic activity will slow down as people are mobilized to help election

campaigns and firms cancel leisure trips for employees before the election.

     By contrast, the Economy Watchers' sentiment index for Japan's current

economic climate rose to a nine-month high of 51.3 in September after being

unchanged at 49.7 in August. Lower temperatures boosted demand for autumn

clothing and the lingering effect of new models supported automobile sales.

     The Cabinet Office upgraded its overall economic assessment for the first

time since the May report, saying, "The economy is picking up steadily."

Previously, it said, "The pickup continues."

     "Looking ahead, there are expectations for continued business investment,

although there are concerns over labor shortages and overseas developments," the

government said, largely maintaining its recent outlook.

     Prime Minister Abe is expected to lead his Liberal Democratic Party and its

smaller coalition partner Komeito to a moderate victory over opposition parties

in the Oct.  22 vote.  

     The biggest threat to Abe is the new national political party created by

Tokyo Governor Yuriko Koike, a former LDP lawmaker in the national Diet.

     There is little difference between the basic conservative political stances

of Abe and Koike. They are both business-oriented with the aim of shoring up

economic growth and both seek a more assertive role by Japan by rewriting the

post-war Pacifist constitution.

     This means means Koike's Party of Hope could steal some LDP supporters if

her promise of faster reforms appeals to them.

     The ruling parties are likely to lose some seats but are fully expected to

retain their majority. If the coalition doesn't win enough seats for a majority,

Abe would resign unless an additional coalition partner was found to create a

majority.

     If the loss is bigger than expected while the coalition retains a majority,

it would indicate voter confidence in Abe's reflationary policy mix is fading,

diminishing the nationalist politician's grip on power within the LDP.

--MNI Tokyo Bureau; tel: +81 90-4670-5309; email: max.sato@marketnews.com

--MNI BEIJING Bureau; +1 202-371-2121; email: john.carter@mni-news.com

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