A Regime Change is Good for Japan     

• The Democratic Party of Japan (DPJ) trashed its rival, the Liberal Democratic Party (LDP), in August 30 lower house elections. This victory gives the DPJ a majority in both houses of Japan's Diet and opens the door for wholesale administrative and budgeting reforms, as well as a new focus on restoring domestic demand. Instead of becoming a strong opposition, the defeated LDP, which has controlled Japan almost uninterruptedly for over 50 years, could end up disintegrating on internal dissention.
• The election is a catalyst for change, but how dramatic remains to be seen. Past reform movements such as the Hosokawa Administration in 1993/1994 and the Koizumi Administration in 2001/2006 proved to be temporary, with overly optimistic expectations in the real political world never realized. That said, regime change will be good for Japan. 
• DPJ domestic demand stimulation policy-related stocks have already begun to move, particularly those stocks related to child rearing and education; as well as those that are expected to lose out, like public works-related construction companies.
• On the other hand, bond investors are leery that DPJ spending will be offset by equivalent reductions in government waste. As for the Yen, some see the regime change as yen positive, while others believe the yen will depreciate. Technically, the Yen is ready to rally.
• If smoothly implemented, DPJ's new policy mix could boost Japan's GDP by 0.5% in 2010 and 0.4% in 2011, as promised expenditures of up to JPY15 trillion essentially replace the Aso Administration’s "wasteful" stimulus package of JPY15 trillion of fiscal expenditures. The risk is that the DPJ has promised much more than they can deliver, and that voters become disillusioned before the upper house elections in July 2010 and hand the upper house back to the LDP.
• Before this happens, however, the market "jury" will have rendered a verdict on whether the China or US economies have really recovered or are headed for a double-dip recession. In the greater scheme of things, this may be more important for Japanese stocks for the remainder of 2009.

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