Japan-focused investors awoke last Monday to a new reality when the Liberal Democratic Party (LDP) won a decisive victory at the polls, ushering the return of Shinzo Abe as prime minister.
So far, so similar, you might think. Abe is Japan's seventh prime minister in six-and-a-half years. Leadership turnover is a regular event in the country, and not one that necessarily excites investors.
What's different about Abe, however, is that he is proposing an aggressive monetary stimulus likely involving sustained quantitative easing. Abe last week met with the head of Japan's central bank asking for a 2 per cent inflation target. In other words, while most central banks have a mandate to keep inflation down, Abe is asking the Bank of Japan to be more assertive in battling deflation, including an ambitious inflation target.
The scale of the LDP's victory is also different from the usual stalemate scenario seen in Japanese politics. Together with its ally, the New Komeito Party, the Abe government will hold 325 of the 480 seats in the lower house of Japan's parliament. As a result, the mandate given to Abe is unambiguous: revive the economy, battle deflation and, if necessary, engineer a weaker yen. Japan could be headed for a period of rapid and major change.
This invites all sorts of questions about the independence of Japan's central bank. But the more central question for investors is: how will the Abe programme affect markets?
The most obvious place to start is with the yen, which dropped last week against major currencies, and could stay weak for a long time.
