Government Change in Japan Tempest in a Teapot?

Observers don't expect massive change from party shift

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The big news in Asia last week was that the political party that had held power in Japan for nearly all the years since World War II--the Liberal Democratic Party, or LDP--had been significantly rejected by voters in favor of a recently formed left-leaning coalition party, the Democratic Party of Japan, or DPJ. Kirk Brown, senior portfolio manager at American Beacon Advisors, says that given the long rule of the LDP in Japan, "this is quite an event as a party that has only been in existence for 12 months takes over."

While most political observers considered the election more of a rejection of the status quo as represented by the LDP rather than an endorsement of the DPJ's policies, there's no question that Japan is in a difficult position. As of August 28, unemployment stood at a postwar high of 5.7%, GDP for 2009 is expected to fall by 6%, consumer spending continues to drop, and deflation remains high--the core CPI fell 2.2% in July.

One of the main planks in the DPJ's formal platform, or Manifesto, Putting People's Lives First, is a family-friendly approach that would pay to families a "child allowance" of 312,000 yen (about $3,900) per year through junior high school, reduce corporate tax rates for small and mid-sized companies, and move to decentralize power in Japan.

As for the new ruling party's approach to the United States, Chris Wolf, managing partner and co-CIO at Cogo Wolf Asset Management in San Francisco, says the DPJ "has purposely kept its cards close to its vest in terms of its anticipated relations with the U.S." Other than saying it "intends to 'review' past assumptions of the last 15 to 50 years, and while adding that they're not anti-U.S., they haven't said much."

As for a Japanese stimulus program for the economy, Brown says the DPJ "will be trying to put more money into the hands of consumers and families while at the same time trying to cut the size of government." Brown suggests that would be a good idea, since "Japan's public debt is nearing 200% of GDP and its ambitious social policy agenda is quite expensive." As for the investment implications of the election, Brown believes that the focus on boosting consumer spending will benefit domestic-based companies, especially in sectors like retail, services, and entertainment, and in stocks like Aeon (a supermarket chain) and 7&I Holdings (parent company of the worldwide 7/11 chain).

While Wolf agrees that the DPJ "may follow a 'cash-for-clunkers' arc" in its policies, he also thinks that "an aging population and restrictive immigration policies will trump all."

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