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The Tokyo Metropolitan Assembly election ended in a landslide victory for the opposition Democratic Party of Japan (DPJ). The political focus now shifts to the next Lower House election. Prime Minister Aso has reportedly told executives of the ruling Liberal Democratic Party (LDP) that he will dissolve that chamber of the Diet and call for a general election on 30 August. The prospects of a DPJ victory have clearly strengthened.

Such a scenario could give a boost to the economy in FY2010. The main focus is the DPJ’s pledge to give families a JPY26,000 monthly allowance per child until graduation from junior high school (JPY13,000 in FY2010-11). This would boost household disposable income by JPY2.9trn in FY2010, especially for families with household heads in the 20-29, 30-39 and 40-49 year age groups. Even though the propensity to consume among households in these age groups has fallen from 80% to around 70% over the past 30 years, private consumption would likely see a boost of around JPY2trn, much of which would be directed into housing (eg, rents) and education. This would lift real GDP by around 0.4% in FY2010.

The DPJ has been criticized for failing to clarify how it will finance such policy measures. Responding to this criticism, however, is probably a secondary concern for the party, which is also eyeing the next Upper House election to be held in July 2010. A victory here - following the one in 2007 (when the other half of the Upper House seats were up for grabs) - would strengthen the party’s influence in both chambers of the Diet. As such, the important issue for the party is how much its policies can support the economy from 2010, especially from Apr-Jun. If the DPJ is to face serious headwinds for not clarifying how it will finance its policies.