Japan: Aso New LDP Chief and Likely New Prime Minister

Daily Forex Fundamentals | Written by Danske Bank | Sep 22 08 10:04 GMT |

As expected, Taro Aso was today elected the new chairman of the ruling LDP by an overwhelming majority. Aso won 351 out of 525 votes cast by LDP members of parliament and representatives of local party branches. Economy minister Kaoru Yosano came second, with just 66 votes, while former defence minister Yoriko Koike came third with 46 votes. Aso will have to be approved as prime minister by the lower house on Wednesday. However, this should prove no obstacle, as LDP and its coalition partner, New Komeito, currently hold a twothirds majority in the lower house. We expect Aso will appoint a new government on Wednesday after being approved by the lower house as PM. The broad support for Aso reflects that the events of the past few weeks have in reality been preparation for the next election to the lower house, which has to be held before September 2009. Indeed, there is increasing speculation that Aso will quickly call an election, with October 26 currently being mentioned as a likely date by the press. However, an election to the lower house is unlikely to shift the current political impasse, where the opposition control the upper house and the ruling LDP-New Komeito coalition controls the lower. If anything, the stalemate is in fact likely to become more entrenched. At present the ruling coalition is able to overrule the upper house on most legislation because of its two-third majority in the lower house, but while the ruling coalition might win an election, it is unlikely to maintain its trump majority card. Further political uncertainty and stalemate will not be supportive for capital inflows into Japan. Aso advocated fiscal easing in his leadership campaign and also postponing the goal of balancing the primary budget by fiscal 2011/2012. He reaffirmed this stance on Sunday, and said that his main near-term priority was to pass an additional budget to support the economy. Hence, with Aso as prime minister the likelihood of major fiscal easing has increased. While it is still unclear if a majority within the LDP is willing to toe the Aso line, the new prime minister will probably not be good news for the bond market. What are the implications for the Bank of Japan? Fiscal easing is unlikely to have any major impact on growth in 2008 when the Japanese economy needs it most. It is also a further nail in the coffin for any interest rate cut that might have been forthcoming from the BoJ to stimulate the currently sluggish Japanese economy. Further fiscal easing would be another argument for the BoJ to stay on the sidelines. Danske Bank http://www.danskebank.com/danskeresearch Disclaimer This publication has been prepared by Danske Markets for information purposes only. It is not an offer or solicitation of any offer to purchase or sell any financial instrument. Whilst reasonable care has been taken to ensure that its contents are not untrue or misleading, no representation is made as to its accuracy or completeness and no liability is accepted for any loss arising from reliance on it. Danske Bank, its affiliates or staff, may perform services for, solicit business from, hold long or short positions in, or otherwise be interested in the investments (including derivatives), of any issuer mentioned herein. Danske Markets´ research analysts are not permitted to invest in securities under coverage in their research sector. This publication is not intended for private customers in the UK or any person in the US. Danske Markets is a division of Danske Bank A/S, which is regulated by FSA for the conduct of designated investment business in the UK and is a member of the London Stock Exchange. Copyright (©) Danske Bank A/S. All rights reserved. This publication is protected by copyright and may not be reproduced in whole or in part without permission.