End to Diet gridlock elates markets

But many see DPJ's policies having negative impact on growth, jobs, spending


Financial markets Monday welcomed the Democratic Party of Japan’s landslide election win because it paves the way for an end to the legislative deadlock in the Diet.

The DPJ gained a sound majority in the powerful Lower House, augmenting the one it and its prospective allies already enjoy in the Upper House.

Investors drove the Nikkei 225 average up 2 percent to its intraday high for the year, but the benchmark index lost the gains to close at 10,492.53, down 0.4 percent from last Friday.

The yen meanwhile jumped to a seven-week high against the dollar in Tokyo, hitting ¥92.76-79 at 5 p.m. versus ¥93.92-93 last Friday.

Market observers are concerned, however, that the DPJ’s policies may weaken domestic demand in the future.

“We expected a change (in government) because frustration over the (Liberal Democratic Party) had grown among market participants,” said Shinichi Ichikawa, chief market strategist at Credit Suisse Securities Ltd. in Tokyo.

“But now, looking at the reality, I expect the start of the DPJ-led government itself to have a negative impact on the economy and the Tokyo stock market because its policies may hurt growth in domestic demand,” he said.

The DPJ’s pledge to lift the minimum wage to ¥800 an hour from the weighted average of ¥703 would raise labor costs, thus forcing companies to shift production overseas or promote automation of their factories, Ichikawa pointed out.

These moves would lead to job cuts and hence a further fall in household spending, he said.

On the other hand, the stock market is cautious over the DPJ’s welcoming of a strong yen, as a rise in the currency against the dollar hurts domestic exporters, the major engine of the overall economy, Ichikawa said.

Ryutaro Kono, chief economist at BNP Paribas Securities Ltd., said the basic problem with the DPJ is its lack of strategy for sustainable economic growth, which in his words translates into deregulation policies.

Freed-up economic activities would lead to growth, he said. “But we (don’t see) them talking about deregulation because they started the election campaign criticizing the reforms (of former Prime Minister Junichiro) Koizumi.”

Market participants, especially foreign investors, became more reluctant to invest in Japanese stocks after the LDP backpedaled on Koizumi’s deregulation policies, observers say.

There is also the problem of how the DPJ will finance its campaign pledges, particularly the monthly child benefits of ¥26,000.

“As far as the (campaign) manifesto goes, there is too much uncertainty over how to finance the measures,” said Tsuyoshi Segawa, equity strategist at Mizuho Securities Co.

“Without economic growth, the government will not be able to continue financing the policies,” he continued. “They won’t be able to finance the policies without increasing the issuance of government bonds, though they have said they won’t issue more bonds.”

Ichikawa of Credit Suisse said, however, more government bond issues will probably not drastically hurt the economy because it will not push up the long-term interest rates at least for the next two to three years. The bonds will be bought by banks amid a lack of borrowers, he said, noting the economy just won’t grow quickly.

There are some bright spots for the stock market, however.

The party’s support of education and land transportation drove education and nursing-care sectors to rise, although experts said these surges may prove short-lived.

Stock prices of nursing-care related companies, including Pigeon Corp. and Unicharm Corp., as well as land transportation firms such as Yamato Holdings Co. and Nippon Express saw short-term buying, experts said.