On Threat Of Diet Dissolution, Take Note Of Japan GDP

One of the most talked topic today is the likelihood of Japanese Prime Minister Shinzo Abe to dissolve Diet lower house and hold snap election before the end of the year.

One of the most talked topic today (13/11) is the likelihood of Japanese Prime Minister Shinzo Abe to dissolve Diet lower house and hold snap election before the end of the year. The rumor is related to speculation on postponement of consumption tax hike that was scheduled for October 2015.

Snap Election Rumor

Before going abroad for international gatherings, PM Abe is reported to have told senior member of the ruling party, LDP, to prepare for an election before 2014 ends. No less than four major Japan news media; Asahi Shimbun, Yomiuri Shimbun, Sankei Shimbun, and Nikkei, reported the rumor, along with the news that PM Abe probably will postpone next year tax hike. The rumor gained more traction after Komeito (NKP), other party in the ruling coalition, is reported to have taken steps in preparation for forthcoming election as well.

Composition of the lower house (House of Representatives) and upper house (House of Councillors) of Japanese Diet

Yesterday, Chief Cabinet Secretary Yoshihide Suga briefly denied both rumor about snap election and tax hike postponement, but it is still widely circulated. Furthermore, Asahi Shimbun this morning mentioned that the ruling coalition is already preparing for snap election either on December 14th or December 21st, with campaign set to start on December 9th. The thing is, PM Abe popularity and the ruling party dominance are possibly in precarious state, and the circumstances may worsen if they ignore voters wish for the government not to increase sales tax as scheduled.

In Asahi Shimbun poll on 8-9 November, only 42% respondents support the current cabinet, dropped from 49% in the previous poll; and 36% said that they did not support the cabinet. In the same poll, 71% of respondents did not think that Japan economy is in the right condition to increase taxes, and 67% wish for the government not to raise tax in October 2015.

NHK surveys on 1,527 respondents also found that supports for PM Abe's government has fallen 8% to mere 44% since last month, and 38% of those surveyed did not support the government. Reuters mentioned that PM Abe's popularity has sunk since political scandal spurred the resignation of two ministers last month. However, 76% of respondents in the same poll did not see the need for a snap election, although 74% thought that next year's tax hike should be postponed or cancelled.

Sales Tax Hike Dilemma

Abenomics grand plan scheduled two consecutive tax hike in 2014 and 2015. Last April, sales tax has been raised from 5% to 8%. The hike has boosted Japan inflation in the next month, but it has slowed again by now. On the other hand, tax hike has hit hard on small and medium enterprises and households because Japan economy as a whole has not fully recovered. Consequently, tax hike hurt aggregate demands, as shown by Japan Q2 Annualized GDP growth that plunged from 6.7% to -7.1%.

Data On Japan GDP Growth Annualized Till Q2/2014

In the circumstances, further sales tax hike from 8% to 10% that was scheduled for October 2015 surely is not suitable with the current economic condition. Nevertheless, the law in which sales tax hike is planned was based on tripartit agreement between LDP, Komeito, and opposition party DPJ. Therefore, tax hike delay will need an amendment of the law. On the other side, DPJ is said to be trying to collect support for a motion of no confidence against PM Abe cabinet. If that is true, then PM Abe might have to push snap election in order to gather supports for his economic decisions.

However, there are also speculations that rumors on Diet dissolution and snap election are mere Abe's bluffs to press oppositions to support his decisions. Some political analysts see Diet dissolution as unnecessary since LDP sits as majority in both lower and upper house (see the composition of Japanese Parliament above). Even so, sales tax hike delay is inevitable, particularly if Japan Q3 Annualized GDP growth disappoints.

PM Abe himself is slated to attend G20 meets in Brisbane yesterday, and will go back to Japan in November 17th. Before that, Japan GDP preliminary report for third quarter of 2014 will be released in Monday, November 16th. Yomiuri Shimbun mentioned that PM Abe shall announce his decision about sales tax hike and snap election after evaluating the GDP report.

Abe's next step is uncertain, but the circumstances present new insight into Japan fundamental economy. It needs to be noted that be it BoJ monetary stimulus or sales tax hike, both are parts of Abenomics that is PM Abe's grand plan in reigniting Japan's slumped economy. In other words, the continuity of Japan economic recovery plans largely depend on its current PM. Diet lower house dissolution could boost support for PM Abe, but it also opens the chance for him to lose his seat if he personally loses supports. For the time being, it will be valuable for Yen traders to observe the development of this rumors and take care ahead and after Japan GDP report publication next week.