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Torrent of support for LDP clears pipes for fiscal spigot

Bloomberg

The magnitude of the Liberal Democratic Party’s win in Sunday’s general election smooths the path for fiscal stimulus in early 2013 as incoming Prime Minister Shinzo Abe seeks to end the economy’s contraction.

The two-thirds majority won by the LDP-New Komeito coalition in the Lower House enables it to override most decisions by the opposition-controlled Upper House. The upper chamber will still have a say on Abe’s picks for leaders of the Bank of Japan, as votes on nominations can’t be overridden.

The scale of the victory may accelerate a recovery from recession next year, even amid Japan’s status as the nation with the world’s biggest public debt. The yen fell to a 20-month low against the dollar Monday as markets assess the chance of further pressure on the BOJ to expand asset purchases this week for the fourth time in three months.

“Japan’s economy will probably see an uptick from around April to June as Abe focuses on short-term policies to support growth,” said Kyohei Morita, chief economist at Barclays PLC in Tokyo. “The LDP may unveil between ¥5 trillion and ¥10 trillion in spending as early as next month.”

Abe, returning to the office he abruptly left five years ago, inherits an economy that fell into a textbook recession last quarter after a diplomatic dispute with China and European austerity measures dragged exports to a fifth monthly decline in October. The median estimate of economists surveyed by Bloomberg forecast another contraction this quarter.

Abe has indicated that economic conditions next year will determine whether a planned consumption tax rise goes ahead. The 5 percent tax was due to double by 2015. He has also called for “unlimited easing” and a doubling of the BOJ’s 1 percent inflation target to end more than a decade of deflation.

“The LDP’s landslide election victory gives it a virtually free hand in policy,” Robert Feldman, head of Japan economic research at Morgan Stanley MUFG Securities Co., said in a report Monday. “The macro stance will shift to ‘print and spend.’ “

Itochu Corp. and JP Morgan Chase & Co. expect the BOJ to expand its asset-purchasing fund, its main policy tool, at a Wednesday-Thursday meeting.

With two former private-sector economists on the BOJ’s nine-member board showing signs of favoring more stimulus, Abe has the chance to install a proeasing majority at the central bank when Gov. Masaaki Shirakawa steps down in April and his deputies exit in March.

Since Abe resigned as prime minister in September 2007, the Nikkei has fallen by around half as the yen has gained around 40 percent against the dollar, while public debt has grown by a fifth to more than twice the size of the economy.

Sony Corp., Panasonic Corp. and Sharp Corp. have announced a total of more than 29,800 job cuts for the year ending March 31 as they try to recover from ¥1.6 trillion in combined net losses last fiscal year. A BOJ survey showed last week that big manufacturers are the most pessimistic in almost three years.

“Japan couldn’t wait any longer,” Masami Yamamoto, president of Fujitsu Ltd., said in a statement Monday. “I expect (the LDP) to promptly start coming up with robust policies that tackle Japan’s grim business conditions head-on.”

Abe may name former Prime Minister Taro Aso as finance minister when he picks his Cabinet as early as Dec. 26, Kyodo News reported Monday.

The LDP’s promise of “large-scale” fiscal stimulus to achieve nominal economic growth of 3 percent may worsen Japan’s debt and threaten further credit-rating downgrades, said Mizuho Investors Securities Co.

“Investors in stocks and currency seem excited, but the outcome was depressing for bond strategists,” said Akihiko Inoue, chief strategist at Mizuho. “Abe has been talking about spending as if Japan’s massive debt isn’t a problem. If Aso becomes finance minister, that would be the worst combination for Japan’s fiscal health.”

Moody’s Investors Service has lowered its rating on Japan’s sovereign debt twice since Abe was prime minister, while Standard & Poor’s has cut once. Moody’s has an Aa3 rating on Japan, the same as Chile and Macau, while S&P has a AA minus rating, the same as Bermuda and China.

Andrew Colquhoun, head of Asia-Pacific sovereign ratings at Fitch Ratings Ltd., said Monday that Abe’s victory has no immediate ratings implications. Fitch has a negative outlook on its A plus rating on Japan.

Elsewhere in the Asia-Pacific region, China said it will seek a higher “quality and efficiency” of growth next year, signaling new leaders may accept a reduced pace of expansion in exchange for a more sustainable model, according to the state-run Xinhua news agency.

Consumer confidence in New Zealand rose to the highest in five quarters, while Singapore’s nonoil domestic exports unexpectedly fell in November.

The euro area’s trade surplus probably narrowed in October on a seasonally adjusted basis, according to a Bloomberg News survey of economists.