Implications of German and Japanese Political Developments

There have been two developments in German and Japanese politics that will likely have implications for future policy.  Let's review the developments and consider the implications for investors.  

There is much talk of the Jamaica coalition in Germany, with the CSU/CSU being joined by the FDP and the Greens.   While the SPD said it would rather be in opposition, we suspect that it is partly a negotiating ploy.  Still, the desire by the FDP and Greens to share power is sufficiently strong that this is the most likely scenario now.  

Apparently, the FDP has a price too.  It apparently wants the finance portfolio.  That means Schaeuble is likely out after an eight-year stint.  Schaeuble will be nominated to be president of the lower chamber of parliament.  He has been a member of the Bundestag for 45 years.   The FDP takes a harder line on EU than Schaeuble, who also seemed to take a firm line.  The FDP wants to allow countries to leave EMU without leaving the EU.  It wants to limit the power of the European Stability Mechanism, which there was some talk that it could eventually evolve into a European IMF.   It wants to introduce automatic sanctions in case of excess budget deficits.  Still, Schaeuble was not a push-over, and he did suggest Greece could temporarily leave EMU.  

Of course, even the FDP pick which rules they want to enforce and which they do not.  Germany's current account surplus has brought criticism from the EU and the IMF.  The size and length of time that its surplus is substantial violates EU agreements.  No one dare talks about a fine.  And when Germany' s budget deficit surpassed the Stability and Growth Pact, Germany (and France) blocked the imposition of fines.  Germany's debt to GDP is also more than the agreement.  In any event, Schaeuble will be nominated on October 17, and that means a new finance minister will likely be picked around then too.  A sub-text suggests the CSU, Merkel's Bavarian-based partner, was also pushing Schaeuble out.  

A Jamaica coalition in Germany may raise questions about what a post-Brexit and post-financial Europe will look like.  The ability pursues greater integration will likely be limited.  Although when accounting for the euro's rise this year,  many talks about the ECB's supposed exit from unorthodox monetary policies (though this seems to be a late 2018 story, not a 2017 story) few appreciate the concerns about European politics as Brexit and Trump's election.  Macron's election may have put the year's bottom in the euro.  The German election may have put the top.   

Turning to Japan, the major opposition the Democrat Party of Japan appears to be dissolving.  It will not register as a party in next month's election.  Nor will it field candidates.  Some will run as independents.  Others may join the "Party of Hope" the new party that swept the recent elections in Tokyo.  

The Party of Hope will run on a three-prong platform.  Freeze the sales tax, which is supposed to increase from 8% to 10% in 2019.  Initially, the sales tax was to be used to reduce debt.  Now Abe wants to use some of the proceeds to fund pre-school and higher education.  Abe has been keen to re-open nuclear power plants.  The Party of Hope wants to end nuclear power (like Germany has done, though it seems to rely on the French keeping their plants).   Third, there is a slogan to "Reset Japan," which is about promoting diversity.  Here, Abe has also taken steps, in part, driven by economic necessity and partly in preparation for the 2020 Olympics.  

Abe called the snap election instead of wait for next year when the current Diet term ends.  He called the election because he thinks his odds are better in light of the bounce in public support following a cabinet reshuffle and the escalation of tensions with North Korea.  If the Tokyo election is the bellwether that it often seems, the LDP is likely to lose seats.  The uncertainty over the re-appointment of Kuroda could intensify, and this will likely increase the yen's volatility.  The political uncertainty may discourage investors from buying Japanese shares.  Note that the four-week average of foreign purchases of Japanese shares was at a six-month low for the week ending September 15.  The net sales in that week were the most since Q1 2016. 

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