Germany and Japan face important elections

The German election matters both for Germany and for the wider European Union. The Japanese election could result in more economic stimulus.

| 5 min read

Germany will have its first change of leader for 16 years when Angela Merkel retires as Chancellor later this year.

Her CDU party’s hopes of continuing to lead a coalition government after the election with their new leader Armin Laschet safely installed as Chancellor have taken a drubbing in recent opinion polls. The CDU/CSU union combined languished on 19% in one recent poll and has been in the low twenties for a little while. The SPD socialist alternative is now topping the polls on as high as 28%, with leads of between 2% and 9%. The Greens have slipped into third place after an early good run. Its policies of higher carbon prices and taxes and faster transition to a green economy are not finding the favour they hoped.

It is still too early to be sure what might emerge. It does, however, seem likely that it will take time to form a new government, as with all parties polling below 30% and most below 20% it is going to take several parties to form a new coalition. It also means there will need to be more compromises over policy platforms.

Greening will continue

The likely centre of gravity of any realistic new coalition will see greener policies as the price of including the Greens. There will be a pro-EU stance. The main left-of-centre runners are thought to be more sympathetic to larger EU budgets and stronger EU economic action than previous German views, based more on prudence and national responsibility for finances. The AFD Eurosceptic alternative is consistently polling around 11%. If that is the final result it will be excluded from coalition talks by all the other main parties.

The Germans still lead the grouping of northern countries on the ECB Board urging less bond buying and money creation and pointing to the current acceleration in inflation as a worry. A new government will not change the views of the Bundesbank suddenly, but the direction of travel is likely to become more communitaire, with growing recognition by German politicians of the extent to which Germany is already an important part of an elaborate transfer system for funds from the richer surplus countries to the others.

It is important to the success of the Euro project going forward that there are larger transfer payments and full mutual recognition of liabilities within the zone. The price will be a bit more inflation than Germany likes and higher taxes in due course as the bills come in.

In Japan, the sudden resignation of Prime Minister Yoshihide Suga has changed the short-term outlook for politics in the run up to the next general election. The most likely replacement as PM is Taro Kono, the vaccines minister. Still to confirm his candidacy, he leads in the polls so far, and is said to have the social media presence and communication skills Mr Suga lacked.

A boost for Japan

Any replacement for Mr Suga is likely to promote a further reflationary package to try to inject more life into a stuttering economy, plagued as it is by extended lockdowns to tackle the virus. We should expect a revised Abenomics package, with Shinto Abe’s three arrows put back into flight – money expansion, more public spending and even perhaps some structural reform.

Most assume the LDP will win the election, to be held by November 28th at the latest. The polls remain fairly inscrutable, with the LDP back up to 43% from a low of 24% recently under PM Suga, but with 25% of voters refusing to say who they favour. Other polls have shown lower figures for the LDP and higher figures for don’t know. The Constitutional Democrat party, the centre left opposition, is on a mere 14% . The polls seem to indicate a governing party bounce from the announcement of a new PM to come. The LDP leadership election will take place on September 29th through a ballot of MPs and party members. The election and possible new energy in policy is positive for markets, but the underlying situation remains disappointing. Low rates of vaccine and great public and policy caution means the economy remains damaged by lockdowns. The government will speed up the vaccination roll out as the public is gradually won over to the treatment. Further stimulus will help sustain financial assets as the Japanese authorities buy shares as well as bonds.

Japan’s foreign policy is likely to stay within the US sphere of support, with Japan an important ally in Asia against Chinese provocations and expansion in the South China Sea. The change in German leadership should allow decent relations between the EU and the USA over issues like green policy , though there will still be some disagreements about the level of European contributions to NATO and Germany’s increasing reliance on Russian gas.

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Germany and Japan face important elections

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