Japan's Elections Will Have Major Impact On US Markets

iStock photo

Over the weekend, the Japanese Prime Minister Shinzo Abe was re-elected, following a highly savvy if risky political move. Abe had seen his popularity plummet in recent months until a resurgence when North Korea launched a missile over Japan. The tough stance that he took towards Kim Jong Un saw his approval ratings jump and he struck while the iron was hot, calling an early election and making dealing with North Korean aggression a key policy issue.

His party won, and even retained a two-thirds majority in the Japanese parliament, the Diet, and the result has massive implications for investors everywhere.

Given that the two-thirds majority is enough to make changes to the constitution, it is understandable that the focus of most of the media coverage thus far has been on the possibility of Japan reestablishing a strong military. That is currently forbidden by their post-WW2 constitution, and such a change could have long-lasting geopolitical implications that reach way beyond the Korean Peninsula.

To avoid a militarized Japan, something that has been a problem in the past, the U.S. and others will feel pressured into an even more aggressive stance towards Pyongyang; and who knows how the North Koreans would respond to that.

As logical and scary as that scenario is however, it is entirely speculation, and, given the potential consequences of a war, hopefully not that likely. From an investment perspective, there are other implications of Abe’s re-election that will have a more immediate effect. In presentative democracies, when we elect politicians we give them a mandate for their whole platform regardless of which issue informed our decision, and in Abe’s case that means that while voters may have been focused on a strong response to North Korea, they also voted for more Abenomics.

The effects of that set of policies, that include massive QE and ultra-low, often negative interest rates, also reach beyond Japan.

The 6-Month Nikkei chart above demonstrates clearly how the Japanese market feels about that. As it became increasingly likely that Abe would overcome the political scandals that have dogged him lately and win a big majority in the Diet the Nikkei has surged upwards, and reached a record of fifteen straight days of gains this morning.

U.S investors should keep in mind that this is not some overseas phenomenon that is interesting to watch but not of great direct concern to them. The political mood here in the U.S. may be isolationist and nationalistic, but regardless of that we still live in a globalized economy, and what is good for Japanese corporations will also be good for America.

That is true of most major overseas economies, but particularly so for Japan, for two reasons. First, to combat restriction placed during the last couple of bouts of U.S. economic nationalism in the 1950s and 1970s, Japanese companies started investing directly in the U.S.

They understood that restricting the import of Honda’s or whatever may seem like a good idea during hard times, but when the cars are assembled in Ohio or Alabama it is not that easy. Honda America has created thousands of jobs and billions of dollars in payroll by investing over $11 billion in total here, and they are just one example. Continued loose monetary policy, ultra-low interest rates and tax cuts in Japan will, therefore translate directly to more investment in the U.S.

The other reason is to do with Japan’s geographic location. The rapidly growing Chinese economy is now one of the major drivers of global economic growth, and a revitalized Japan on their doorstep encourages more aggressive pro-growth policies in what is still, lest we forget, a government-controlled economy.

However, the U.S. is still the world’s largest economy, and as such, benefits hugely from generalized favorable economic conditions. Add those two together and it is clear that this weekend’s news will add to market optimism here in America this week, and help sustain the rally in stocks.

One of the things that I learned by living and working in financial markets in multiple countries is that domestic bias exists everywhere, not just in terms of where people invest, but also what news they believe influences those investments. Do not make that mistake in this case. At first glance it may seem that a political success on the other side of the world should not be a major influence on your decisions, but dig a little deeper and you can see that Abe’s re-election will have profound effects here in the U.S.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Read Again Japan's Elections Will Have Major Impact On US Markets : http://ift.tt/2hZSuEq

Let's block ads! (Why?)