Japan: Impact of Upper House election, Part 1

- Major defeat for DPJ — "The ruling coalition must be reshuffled for the DPJ to retain control of the Diet. The DPJ, People's New Party, and independents affiliated with the ruling coalition now have 110 seats after Sunday's Upper House election, short of the 122 seats required for a majority. The Kan cabinet's approval rating has fallen sharply in the month since Kan became PM."
- Focus turns to September 20 DPJ leadership election — "When the ruling party
has lost an Upper House election in the past, the PM has resigned immediately or soon after. Sosuke Uno and Ryutaro Hashimoto resigned immediately, and Tomoiichi Murayama and Shinzo Abe resigned within a year."
- Consumption tax hike looks unlikely — "If political leadership weakens, it will be
difficult to implement large-scale tax reform. Hiking the consumption tax requires strong leadership, so it is unlikely to happen for now. We do not expect an increase until 2014 at the earliest."
- Major corporate tax cut also unlikely — "The DPJ had hoped to fund this by scaling back special taxation measures. Those affected are strongly opposed to the ¥5.9trn (net) reduction in tax cuts (the naphtha exemption alone is worth ¥3.6trn). However, a small-scale reduction seems possible."
- Deregulation, selling off government assets — "Regardless of what shape the next administration takes, given the enormous size of Japan's budget deficit we think it needs to 1) ease tourism and real estate regulations and 2) sell off government assets. Selling government assets and deregulating real estate would be positive for the real estate, transportation, construction, internet, and service sectors."
- Political realignment and share prices — "If the DPJ sacrifices the postal reform bill and ties up with Your Party (a strong advocate of small government), we think it would actually be good for stocks. We highlight Sumitomo Realty & Development, JR Central, Rakuten, Yahoo, ANA, and Oriental Land as stocks that could benefit."
Citigroup Corporate Securities Strategy 20100713

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