- Japanese general elections are slated for August 30th—the long-ruling Liberal Democratic Party could be on its way out in favor of the opposition Democratic Party of Japan.
- Though many see the move away from the LDP as a move away from Western-style capitalism and pro-growth reforms, in reality, those market-oriented changes have stalled for years.
- Japan is the world's second-largest economy, but it's only about 8% of the global economy and 10% of global equity markets. The world can move forward with or without Japan.
Japanese technologies change faster than most people blink. The Japanese government, on the other hand, is a bit more static—the same party has ruled for most of the last half century. But if polls are correct, the long-ruling Liberal Democratic Party (LDP) could be on its way out in favor of the opposition Democratic Party of Japan (DPJ).
Not unlike the recent presidential election in the US, the leader of the DPJ and prime minister candidate, Yukio Hatoyama, is campaigning on a platform advocating change. It seems Japanese citizens like what they hear. The DPJ is forecasted to win 300 seats (out of 480) in Japan's lower house parliamentary elections on August 30th. While the election outcome may be fairly clear, the potential impact on stocks isn't.
The LDP is generally considered the more business-friendly of Japan's political parties. In 2005, the LDP gained a substantial majority in the powerful lower house of parliament when then-Prime Minister Junichiro Koizumi held a general election as a referendum on his pro-growth economic and capital market reforms. That year, Japanese stocks surged on optimism the reforms would boost the Japanese economy and stock market.
Part of Hatoyama's campaign platform focuses on attacking Koizumi's reforms, criticizing American-led "market fundamentalism," and advocating more social programs. Though many see this as a sign Japanese politics could be moving away from free-market capitalism, in reality, market-oriented changes have stalled there for years. There's been little follow-through on Koizumi's initiatives: Postal privatization seems to be moving at a glacial pace, triangular mergers intended to help foreign companies purchase Japanese firms have barely been used, foreign direct investment in Japan remains extremely low, and Japanese taxes are relatively high.
Investors familiar with Japan recognize it's different from many other developed nations. Japan's is a modified capitalist system with deeply entrenched customs, so differences between Japanese and Western business cultures loom large. Japanese companies favor career advancement based on seniority and commonly offer lifetime employment, corporate mergers and acquisitions are rare compared to Western countries, and shareholder's interests are often an afterthought at Japanese firms.
Hatoyama might be pouncing on change in his campaign, but it's hard to say how much change is actually possible. Elsewhere, including here in the US, ambitious politicians typically moderate once elected to gain reelection down the road. It'll be interesting to see if this also proves true in Japan. Upcoming elections in the upper house (currently controlled by a DPJ-coalition) in 2010 may mean the DPJ will have to play it somewhat safe and not make too many drastic changes or risk alienating its new supporters. Plus, despite the seemingly socialist-leaning agenda, some DPJ proposed measures are decidedly pro-growth, including calls for lower corporate taxes, eliminating the gasoline tax, and further delaying increasing the consumption tax.
Japan is the world's second-largest economy, but it's only about 8% of the global economy and 10% of global equity markets. Even if the upcoming election turns out to be a step backward for Japan, the rest of the world can still move forward, and global investors can benefit from the many investing options available worldwide.