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The Big Outcome of Japan’s Elections: Economic Rivalry

As Via Meadia noted yesterday, Shinzo Abe’s LDP cruised to victory in Japan’s elections yesterday, winning 294 seats. In coalition with its partner New Komeito, which won 31 seats, the LDP will have enough votes to override the Democratic Party of Japan-controlled upper house. The market is already responding to the new PM’s likely plans:

The yen fell to a 20-month low against the dollar and stocks rose to an eight-month high on expectations Abe will expand monetary and fiscal stimulus in a bid to defeat deflation. Japan’s seventh leader in six years, he inherits a country in recession, still reeling from the 2011 earthquake and nuclear disaster, and embroiled in a diplomatic dispute with China, with an upper house election only seven months away. [ . . . ]

The LDP leader has also called for strengthening control over the islands known as Senkaku in Japan and Diaoyu in China, and has pledged to boost defense spending. Japan’s purchase of the island chain in September sparked violent demonstrations in China and damaged the $340 billion trade relationship between the world’s second-and third-largest economies.

The big outcome of these elections is unlikely to be a shooting war with China over the Senkaku/Diaoyu Islands dispute. But we will see a deadly serious economic rivalry: under Prime Minister Abe, Japan is pledged to print money to stimulate the economy. Clearly the new government wants to bring the yen down to make Japanese manufacturing more competitive against China, whose currency tends to float with the dollar. This move is likely to have repercussions around the world, driving other major world economies (like the U.S. and Brazil) to push their own currencies down and probably forcing China to follow suit.

The ratings agencies, increasingly spooked by Japan’s colossal debt burden after decades of failed stimulus and infrastructure spending, are taking note. More spending, warns Fitch, could lead to downgrades on Japanese debt.

However, Abe’s biggest threat may not come from the ratings agencies. Japanese politics moved sharply to the right in the last election, with the ultra-nationalist Japan Restoration Party winning 54 seats, almost level with the outgoing governing party, the DPJ. Abe is going to have a tough time balancing vociferous demands from the right for a harder line against China with Japan’s need to keep the China dispute within acceptable bounds.

One thing to watch for in the new government: will Japanese industry accelerate a shift of capacity away from China? While China has many assets as an export platform, countries like Indonesia, Vietnam, and now Burma can compete with it on labor costs—and they do so without the political risks the Japanese are beginning to associate with investments in China. Many Japanese companies seem to be moving aggressively to diversify their production chains away from an excessive dependence on China.

This investment issue is one of the many huge stories in Asia that the MSM, crippled both by resource cutbacks and a traditional Atlantic fixation, is not covering well. A new world order is being assembled in the Pacific, and Americans who depend on the MSM for their coverage aren’t getting the information or the analysis they need.

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