09 October 2017
Japan’s Surprise General Elections Reinvigorates Nikkei 225 Index
  • The Nikkei 225 Index recorded a 2 year high after Prime Minister Shinzo Abe called for early elections on 22 October, a year before the election was due.
  • Since the start of Abenomics, corporate profits have grown, however inflation remains far from Bank of Japan’s target of 2%. The improved business sentiment and higher corporate profits have also yet to translate into significant pay increases.
  • In the month following the election day for the past 5 elections, the Nikkei 225 Index and the Japanese Yen have moved an average absolute percentage of 5.2% and 3.6%, respectively.
  • SGX offers the world’s widest suite of offshore Japan products. SGX Nikkei Futures slippage cost has declined 45% since the start of 2017 while month-end outstanding positions in SGX Nikkei Options has grown to a 34-month record high, as at 30 September 2017.

Surprise General Elections Reinvigorates Nikkei 225 Index

The benchmark Nikkei 225 Index, representing the Japanese equity market, staged a strong rally in September, increasing 3.6% over the previous month as a moderation of international tensions between Japan and North Korea provided the backdrop to Prime Minister Shinzo Abe’s call for October snap elections.

Prime Minister Abe dissolved the lower house of Japan’s parliament on 28 September and scheduled the General Elections for 22 October. The election was scheduled more than a year early in what has been seen as a bid to leverage on Prime Minister Abe’s improved approval ratings, positive economic statistics and higher public approval ratings following his handling of the North Korea tensions.

The Nikkei 225 Index has reacted positively to the upcoming General Elections, breaking above the key psychological level of 20,000 points to record a 2 year high of 20,690 points on 6 October.

On the same day that Prime Minister Abe announced the General Election, Tokyo Governor Yuriko Koike introduced a new national party, dramatically altering the dynamics of the election.

Koike’s Party of Hope (POH) differs from Prime Minister Abe’s Liberal Democratic Party (LDP) in two key ways. Firstly, the LDP supports the second consumption tax hike to provide free education and cut waiting times at childcare centres, while the opposition POH wants to suspend tax hike plans. Secondly, the LDP intends to restart nuclear power plants while the POH is resolutely against nuclear power.

Taking Stock of Japan’s Reflation Journey

After close to 5 years of Abenomics, corporate profits have grown while the Japanese yen has depreciated. However inflation remains far from Bank Of Japan’s (BOJ) target of 2%. Additionally, the improved business sentiment and higher corporate profits has yet to translate into significant pay increases.

Japan’s quarterly BOJ Tankan survey is a litmus test to gauge the health of Japan through measuring the general business economic and trade activity. In September, the Tankan survey for large manufacturing enterprises reported the highest confidence levels in a decade. Sentiment among large manufacturers rose to 22 from 17 at the end of June 2017. The sustained improvement in business sentiment underscores the modest but ongoing economic recovery. 

Japan’s economy has recorded 6 quarters (18 months) of expansion, the longest period of economic expansion in more than a decade. The last time Japan’s economy saw more quarters of growth was back in 2001, when GDP growth was sustained for two years.

 

 

Core consumer prices, which exclude fresh food, increased 0.7% in August from a year earlier, extending the inflation run to 8 months. Although this is the longest streak of inflation in more than two years, inflation remains below BOJ’s target of 2%. Since Prime Minister Abe took charge, unemployment has fallen to 2.8%, the lowest in two decades.

Hourly wages have risen consistently, benefiting the country’s expanding ranks of part-time workers. However, real wages have not grown in tandem. August cash earnings increased 0.9% from a year earlier, the strongest gains in more than a year, making a rebound from a 0.6% decline in July. Growth in corporate profits was reflected in higher bonuses which saw a 6.1% pick up. Japan’s central bank policy makers are intently watching to see if the tight labor market will translate into sustained wage reflation and spur inflation growth.

Abenomics has arguably not succeeded in breathing life into all aspects of Japan’s economy. Some economists suggest that if Prime Minister Abe wins the election, his plan to channel more public resources into education and child care would likely be positive for consumption and support inflation.

How Will The General Election Impact The Nikkei 225 Index?

Historically, the Nikkei 225 Index and the Japanese yen have experienced large moves in the month following the election. In the past 5 elections, the Nikkei 225 Index has moved an average absolute percentage of 1.0% on the day after the election and 5.2% in the one month following the election. The Japanese Yen has moved an average absolute percentage of 3.6% against the US Dollar in the one month following the election.

Year

Day after Election (1 Day Change %)

1 Month After % Change

Nikkei 225 Index

USD/JPY

Nikkei 225 Index

USD/JPY

2014

-1.60%

Appreciate 0.8%

-1.60%

Appreciate 0.7%

2012

0.90%

Depreciate 0.4%

11.70%

Depreciate 6.3%

2009

-0.40%

Appreciate 0.5%

-4.10%

Appreciate 3.7%

2005

1.60%

Depreciate 0.6%

6.80%

Depreciate 4.5%

2003

-1.20%

Appreciate 0.5%

-4.70%

Appreciate 1.9%

Average Absolute Change (%)

1.0%

0.6%

5.2%

3.6%

Source: Bloomberg            

SGX offers the world’s widest suite of offshore Japan products, including the flagship Nikkei Index Futures and Options to enable investors to hedge positions or gain exposure. Recent developments include 45% lower slippage cost (using a 50 lot trade example) for the SGX Nikkei Futures since the start of the year, while open interest of the SGX Nikkei Options has grown to a 34-month record high.

For more information, please visit www.sgx.com/derivatives/nikkei225.

 


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