Political change in Japan could boost domestic consumption

A victory for the opposition Democratic Party of Japan (DPJ) in next month's snap general election could boost domestic consumption, according to Stefan Bain, who manages the F&C Japanese Equity Fund alongside Jamie Jenkins.

The DPJ has announced a series of policies which may have a significant impact on certain areas of the Japanese economy. "The DPJ pledges to support domestic consumption", said Bain.

"Historically much of Japan's economic growth has been driven by exporters, while domestic demand has languished", he said.

Amongst the DPJ policies to address Japan's demographic time bomb and raise the country's falling birth rate are plans to double the monthly child allowance to 26,000 per month per child, irrespective of parental income, potentially equating to a considerable 624,000 (£4,000) yearly payment to for a two child family.

Additionally, they have pledged to increase the nursing supply and child care services by 50% by raising salaries and promising to eliminate high school fees, set a new minimum pension and grant tax benefits for housing. Through such measures, their aim is to increase disposable income by 20%, though this is a very challenging target via fiscal spending alone.

The DPJ are keen to reinvigorate the Japanese economy by revitalizing struggling small and mid sized companies.

"It is still too early to say if such a clear commitment to SME's will result in more hostile policies toward large companies, but it is clear that large businesses have not been the focus of their announced policies so far", Bain continued From an investment perspective, the DPJ's stance on the environment is the area where Bain and the Japanese equities team see particular opportunities. The party has a more ambitious approach than the Liberal Democratic Party (LDP) on this issue and aims to reduce carbon emissions by 25% versus 1990 levels by 2050 compared to the LDP's target of 15%.

The opposition party is also committed to support 50% subsidies of private households' solar panel installations.

"Japan has a leading solar panel industry and demand fell when subsidies were cut. Should subsidies rise again we would consider increasing our exposure in this sector", he concluded.