NEW YORK (CNN/Money) - Investors lucky enough to have put money into the Japanese stock market this year have been treated to outsized gains. With the country heading to the voting booth on Sunday, they have to wonder if the rally has any more legs.
Facing off in the election are Japan's Liberal Democratic Party, which controls the coalition that leads the government today, and the upstart Democratic Party of Japan. More broadly speaking, the election is a fight between those who would continue to push for reforms in Japan -- like cleaning up the country's banks -- and the old-guard politicians who will push for something like the status quo.
The reform and anti-reform candidates are by no means split along party lines. The LDP has traditionally been a stodgy party, the voice of farmers who, through the miracle of Japanese gerrymandering, have an outsized representation in the country's Diet. But the LDP is run by the reform-minded Junichiro Koizumi, Japan's most dynamic Prime Minister since Yasuhiro Nakasone, who held the reigns in the 1980s. The DPJ is headed up by Naoto Kan -- another reform-minded politician.
Both Koizumi and Kan's party leaderships are not without risk. Some LDP members, for instance, would push for the sort of big-spending policies that have so far done nothing to restore Japan's economy. Some DPJ members, on the other hand, are closely allied with trade unions, and would push for higher social spending and higher taxes. If either of these elements were to take control in the election, the Japanese economy could sour.
The best scenario, according to Morgan Stanley chief economist for Japan Robert Alan Feldman, will be if reform-minded elements in the LDP are given a broader mandate. With the Japanese electorate clamoring for change, he is hopeful that this is exactly the scenario that's going to play out.
Such an outcome would break what have Feldman has come to call the CRIC cycle -- standing for crisis, reform, improvement, complacency -- that has played out again and again over the past dozen years in Japan.
At the current juncture, Japan is clearly in the improvement part of the cycle, the place where Japanese policymakers have historically decided that the economy is on the way to mending itself and they don't have to do anything anymore. A Koizumi win could mean that the complacency stage just won't happen.
For investors in Japan, who have already seen the Nikkei put on its best rally in years, that would be great news. For Japan's citizens, who have suffered under a stagnant economy for over a decade, it would be even better.
|
