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Japan post election market euphoria short lived

TOKYO, Aug 31 – Japanese financial markets staged a brief victory rally on Monday after a landslide win by the opposition Democrats, but the initial euphoria soon gave way to doubts about how they will run the economy.

The Democratic Party of Japan\’s historic victory raised hopes of a fresh start for the world\’s second-largest economy following its worst post-war recession and two decades of more general economic malaise.

The yen scaled a seven-week peak against the dollar and the Nikkei index touched a new high for 2009 in early trade as investors gave a positive early reaction to the DPJ\’s overwhelming victory.

The dollar fell to as low as 92.54 yen, its lowest level since July 13, down from 93.29 in New York late Friday.

But the stock rally proved short-lived – partly because of the stronger yen and losses on the Chinese market, but also because markets are unsure what the DPJ will do when it takes power. The Nikkei ended down 0.40 percent.

In particular, markets are waiting to see who will take the key cabinet posts, including the job of finance minister.

"The direction of DPJ economic policy will remain unclear for several weeks at least, until political factors settle," said Morgan Stanley senior economist Robert Feldman.

"The DPJ will have to choose coalition partners, appoint personnel, determine policies, and then propose and pass legislation."

The centre-left DPJ has promised to boost household incomes with measures including cash allowances for child-raising, free high-school education, a higher minimum wage, petrol tax cuts and an end to highway tolls.

"There is the prospect of a short-term boost to growth, but its basic economic policy stance is not particularly market-friendly," said Richard Jerram, chief Japan economist at Macquarie Securities.

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"If the DPJ decides to push ahead with its spending plans without being able to find cost savings, then we would expect the bond and currency markets to react negatively," he warned.

The DPJ is generally seen as less business-friendly than the outgoing Liberal Democratic Party and has pledged to shift the focus from big business to households to create a more equitable society.

DPJ leader Yukio Hatoyama has also floated the idea of creating a single Asian currency.

Fujio Mitarai, the head of Japan\’s top business lobby Nippon Keidanren, urged the DPJ to work with other political parties on economic reforms.

"What\’s most important as a short-term goal is to secure a recovery from the economic crisis," Mitarai, who is also chairman of high-tech Canon Inc., said in a statement.

The Japan Automobile Manufacturers Association expressed concern about the DPJ\’s ambitious plans to curb greenhouse gas emissions, which it said would "have a large impact on economic activities and employment."

The DPJ\’s victory comes as Japan slowly emerges from a year-long recession caused by a collapse in exports due to the global economic downturn. Its economy grew in April-June for the first time in five quarters.

In a further sign of improvement, factory output rose by 1.9 percent in July from June, marking a fifth straight monthly gain.

But with unemployment at a record high of 5.7 percent and deflation deepening, the fear is that the recovery shoots may soon wilt.

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Other data released Monday highlighted the weakness of the domestic economy. Average monthly wages fell 4.8 percent in July from a year earlier, after a record decline of 7.0 percent in June.

Retail sales dropped 2.5 percent in the same month — their 11th straight year-on-year decline.

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