[BillPaay]

The Japanese elections on Sunday resulted in a landslide victory for the Democratic Party of Japan (DPJ), bringing to an end 54 years of almost uninterrupted LDP rule. However the basis for the win has been voter rejection of the LDP, rather than enthusiasm for the DPJ. There are no great expectations that the DPJ will be able to change much, and certainly much doubt that the new occupants will be any different to the old ones. This is no ‘Obama moment’. In that respect we do not see a wave of optimism sweeping markets higher in anticipation of the re-birth of Japan.

Having said that, the effect of overall DPJ policy will be to shift government spending from corporates to consumers; this should lead to a more dynamic and productive allocation of capital. A second policy goal is the improvement in the social safety net through increased protection of part-time workers and reduced health-care co-payments. To the extent that this safety net is seen as credible the consumer’s propensity to spend should increase. The DPJ have also hinted that their shift in focus away from corporate concerns may reduce the focus on the level of the currency, essentially removing the ‘BoJ Put’ which has supported a higher USDJPY. Market therefore views the DPJ win as supportive of a stronger JPY, not just in the short-term, but depending upon to what degree the DPJ succeeds in implementing its program, potentially also longer-term.

The Shanghai equity market has fallen sharply yet again, with liquidity concerns and a busy upcoming IPO schedule ostensibly the triggers. To the extent that the latter reason that is behind the drop, rather than concerns of liquidity withdrawal, the market might be expected to discount the fall. In this respect commodities prices will now point the way in determining whether this is tightening by stealth –prompting a fall in other asset prices – or simply a hiccup in the Chinese recovery story.