REPEAT: MNI ANALYSIS: Japan Election Neutral For Economy

Repeats Story Initially Transmitted at 07:28 GMT Sep 28/03:28 EST Sep 28

By Max Sato

     TOKYO (MNI) - Japan's snap election is expected to have a neutral impact on

the modest economic recovery and buoyant stock markets even if the ruling

coalition only wins a thin majority in the Lower House, analysts said.

     Market participants expect Prime Minister Shinzo Abe to lead his Liberal

Democratic Party and its smaller coalition partner Komeito to a moderate victory

over opposition parties, some of which are trying to coordinate in fielding

candidates.

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

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

Abe would resign unless an additional coalition partner was found to fill the

gap.

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

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

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

     Even in that event, the current policy framework of aggressive monetary

easing, increased fiscal spending and structural reforms is unlikely to change

much.

     "People don't increase or decrease shopping because of an election. It is

neutral for the economy," said Yasunari Ueno, chief market economist at Mizuho

Securities. "In the markets, nobody expects the ruling coalition to lose its

majority."

     "How the ruling parties will win is more important but even if they lost

many seats close to a simple majority and the driving force of Abenomics looks

to be waning, the impact would be subtle: there might emerge more debate on how

to exit from monetary easing."

     Investors will be monitoring opinion polls leading up to the Lower House

election on Oct. 22, but at this point, there are no decisive factors to help

them price in election outcomes.

     "When the economy is doing fairly well, people seek stability, instead of

looking for change from the current environment. There is little room for pros

and cons of the government policies affecting them," said Mitsubishi UFJ

Research and Consulting economist Shinichiro Kobayashi.

     By contrast, back in late 2012, voters wanted change after the Democratic

Party failed to implement growth-oriented structural reforms during the three

years it was in power. That's when Abe's promise to "regain Japan" by

revitalizing the economy and taking a more assertive diplomatic role appealed to

many voters, Kobayashi said.

     In the competition for over-simplified campaign phrases, Tokyo Governor

Yuriko Koike, a former LDP lawmaker in the national Diet, launched a new

conservative party this week, promising to "reset Japan" through "reforms"

without providing specific policy goals. She criticized Abe for being too slow

in implementing the structural reforms he promised nearly five years ago.

     There is little difference between the basic conservative political stances

of Abe, 63, and Koike, 65. 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.

     However, Koike is trying to appear different from Abe by calling for a

complete shutdown of all nuclear power plants in Japan and freezing plans to

raise the sales tax. If voters see a fresh image in Koike's party, it could

emerge as an alternative to Abe's LDP.

     "There are politicians who want to rewrite the constitution inside and

outside of the government, in the Party of Hope, the Democratic Party and the

Japan Innovation Party. They all look like they came from the same circle to

me," Mizuho's Ueno said.

     In a desperate attempt to remove the LDP from power, Seiji Maehara, the

leader of the main opposition Democratic Party, said Wednesday he would allow

his party members to run with the endorsement of Koike's party. DP comprises

both conservative politicians like Maehara and more liberal lawmakers who

represent the interests of labor unions.

     Some DP members worry Maehara's move will ensure the disintegration of

their party, while other members think it is inevitable following the recent

slip in voter support for their party, press reports said.

     Koike said the two parties are unlikely to fully join hands for the

election, given there has been no discussion on whether they can agree on key

policies, the reports said.

     "I think the chance of Koike's party winning more votes was higher

yesterday before Maehara proposed joining hands in the election," said Shunsuke

Kobayashi, economist at Daiwa Institute of Research.

     "Some supporters of the Party of Hope may not like the idea. Koike is a

seasoned politician. She may not team up with the Democratic Party."

     Koike has held defense and environment cabinet portfolios in the past. She

has gone through many political parties, riding the tide of winning groups in

national politics.

     In July, she led her local party Tomin First no Kai (Tokyoites First Party)

with its reformist agenda to a landslide win in Tokyo metropolitan assembly

elections, crushing the Abe's LDP. Koike's national party will try to cash in on

the local victory while it is still fresh in the memory of voters.

     There is even the possibility that Koike will join Abe's ruling coalition

if she has ambitions to become a future prime minister.

     "But she would save her ace until after the election so the Party of Hope

would have bargaining power if the current ruling parties loses many seats and

is looking for a coalition partner," Daiwa's Kobayashi said.

     At this point, the Party of Hope is still trailing Abe's LDP by a wide

margin.

     The latest poll by the Mainichi Shimbun newspaper conducted this week

showed 18% of those polled said they would vote for the Party of Hope in

proportional representation constituencies while 29% said they would choose the

LDP.

     In a survey by the Asahi Shimbun daily, 13% of those polled said they would

vote for Koike's party and 32% for Abe's.

     "Even if the LDP wins, if it's a tight margin, it may raise voices among

LDP politicians that Abe will have to be replaced," said Akiyoshi Takumori,

chief economist at Sumitomo Mitsui Asset Management.

     Shigeru Ishiba is seen as a top candidate to succeed Abe if the prime

minister loses support among party elders.

     Ishiba, a former LDP secretary-general and defense minister, has often

criticized Abe's policies, including his latest proposal to revise Article 9 of

the Constitution, which renounces war. He has also chided Abe about the policy

measures in his growth strategy and reform menu, saying they keep changing every

year.

     Within the LDP, some politicians are opposed to aggressive monetary easing,

which has so far failed to raise inflation to the Bank of Japan's target of 2%.

They have also called for a shift to stricter fiscal discipline, instead of

seeking to create demand through public projects.

     "If Ishiba were to become the prime minister, he might replace the

Abenomics policy goals. He supports tax hikes for fiscal consolidation,"

Takumori said.

     Abe dissolved the Lower House on Thursday to call an early election to seek

voter views on his proposal for a "drastic shift" in government policy toward

using the planned sales tax hike to fund new program spending totaling Y2

trillion.

     Abe has defended his reflationary policy mix of aggressive monetary easing,

increased fiscal spending and structural reforms, saying more jobs have been

created since he returned to power in late 2012, although inflation is far from

the 2% he had promised to achieve.

     To continue his policy of completely overcoming deflation and supporting

sustained economic growth, Abe said the government will promote business

investment in technology and urge corporate efforts to raise productivity.

     The government will also implement free high school and university

education for qualifying students from low-income families in a bid to stop

existing income inequality from widening the gap in access to higher education,

he said.

     As the working-age population continues to shrink, the government will also

provide fiscal support for child-rearing and care-giving while seeking to

further improve working conditions for care-givers, he added.

     In April 2014, the sales tax was raised to the current 8% from 5% in order

to cut the nation's huge public debt, now more than double its GDP, and pay for

an increase in government funding of public pension plans.

     The second stage of doubling the sales tax rate to 10%, which has been

postponed twice by Abe in what opposition parties called a political move to

shore up his voter support, was aimed at reducing public debt.

     Initially, the government planned to spend Y4 trillion of the estimated tax

revenue increase from doubling the sales tax rate to 10% to pay down the debt

and Y1 trillion on improving social security programs.

     Abe said he has decided to change the plan and won't use much of the tax

revenue on repaying the huge public debt -- a move economists said would further

delay the process of fiscal consolidation and reduce the flexibility of fiscal

policy.

--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