Prime Minister Shinzo Abe has this morning officially reshuffled his government. Most of the details were already leaked yesterday.
Taro Aso and Akira Mari stay as finance minister and economy minister, respectively, signalling continuity on economic policy. This is not a big surprise. Finance minister Aso is a fiscal policy hawk so this increases the likelihood that the consumption tax will be raised again as planned from 8% to 10% from October next year. A final decision on the consumption tax is expected to be made at some stage in Q4. However, the hike in the consumption tax next year is not a done deal in light of the larger-than-expected negative impact from the consumption tax hike from 5% to 8% in April this year. With Japan most likely continuing to face fiscal headwinds next year, monetary policy in Japan will have to stay extremely accommodative and possibly even ease further. Hence, this is yen negative.
Yasuhisa Shiozaki has been appointed health minister. This is important because the health ministry has supervision responsibility for the Government Pension Investment Fund (GPIF) - the world's largest pension fund. Shiozaki is a strong supporter of governance reform for GPIF including diversifying its investment portfolio away from domestic government funds. GPIF is expected to announce new targets for its portfolio during the autumn. The target for investment in domestic government bonds could be cut from currently 60% to 40%. Conversely, the target for domestic stocks and foreign securities is expected to be raised significantly. Again, this is yen negative.
There has also been a minor reshuffle in the leadership of the Liberal Democratic Party (LDP) that appears to be a minor defeat for the foreign policy hawks. Super hawk Shigeu Ishiba has been replaced by Sadaku Tnigaki as LDP's general secretary. It gives some hope that the strained relationship with China and South Korea could start to improve and government focus now to a larger degree will turn to structural economic reforms. In our view, the foreign and security policy has distracted substantially from the structural economic reform agenda which so far has shown little progress since Abe assumed power in December 2012.
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