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Shinzo Abe secures fresh mandate in Japan election

Kiyoshi Ota | Bloomberg | Getty Images

Shinzo Abe won his snap election on Sunday and his ruling Liberal Democratic Party (LDP) and coalition partner maintained a supermajority, according to media exit polls, giving the Japanese prime minister a fresh mandate for his struggling strategy to revive the economy. The leading LDP party along with its coalition partner, New Komeito, won at least 317 seats in Japan's 475-seat lower house, most polls showed, maintaining a 'supermajority' with over two thirds of the lower house. Official results will be released on Monday morning, but, historically, media exit polls have proven accurate. "I am relieved the ruling party coalition has won a majority and the government has been maintained," Abe said on NHK news. The low voter turnout is disappointing and shows "we need to improve voters' trust in politics," he said. "The economy is our priority - we will ask business leaders to raise wage in April and make sure the recovery spreads to the whole economy."Read More Japan 4Q manufacturing sentiment worsens: Tankan Abe called for a snap election on November 18 and dissolved the lower house of parliament a few days later after the impact of a consumption tax hike to 8 percent from 5 percent in April pushed the economy into recession. Abe also delayed a second sales tax hike to 10 percent, initially scheduled for October 2015, by 18 months amid concerns that it could further derail growth momentum. The decision to call elections came as Abe's approval ratings faltered. In November, a poll by national broadcaster NHK showed support for Abe's LDP-led government declining 8 percentage points from the previous month to an all-time low of 44 percent amid increasing uncertainty over his effort to spur the economy. Despite his low approval rating, many were confused by Abe's decision to call an election as elections weren't due until late 2016. Analysts believe the prime minister took the gamble of an early election in order to gain leverage to push through unpopular reforms deemed necessary to achieve his economic and political aims. Abe's 2014 campaign pledges echoed those of his 2012 campaign, with promises to revitalize the economy, pursue fiscal reconstruction, promote the participation and advancement of women in the workforce and to revise the constitution. "This is a big victory for the LDP," Finance Minister Taro Aso said on NHK. "This would be a clear endorsement of Abenomics." Muted turnout While Abe achieved a fresh mandate, voter turnout speaks volumes about public sentiment. Voter turnout is estimated at less than 53 percent, the lowest turnout since World War II as many voters were resigned to a victory for Abe and his LDP amid a lack of viable alternatives. The previous post-war low of 59.3 percent was set during the 2012 elections. "There's no other choice" a 42-year-old financial professional that voted for the LDP told CNBC at a voting station in Akasaka primary school, in Nogizaka, on Sunday afternoon. "It doesn't make any difference which party is in power," a taxi driver in Tokyo told CNBC on Sunday, "the LDP is the only one competent enough to run the government." Asked whether he thought Abe's policies to stimulate the economy were working the driver said "One hundred percent of clients say they do not feel the economy is recovering."Read More Japan October machinery orders well below expectations Nationalist sentiment While focus has largely been on Shinzo Abe's economic policies, the final words of his campaign were about defending Japan.

"We will defend the people and territorial integrity of Japan," Abe said, concluding a twenty-minute speech at the final LDP rally of the campaign on Saturday night as hundreds of supporters waved Japanese flags.

"We can't go back to a strong yen," Abe said earlier in his speech. "Do you all remember when Japan's excellent products were being outsold by China and Korean made products all over the world?" This is exactly what some supporters wanted to hear. "I didn't come here to support the LDP's ideology. I wanted Abe to confirm the government will take a firm stand against China and South Korea," said a 53 year-old man and who declined to give his name.

"Abe is the only one that will stand up to China and Korea - and the media won't report on it," a 67-year old woman who also declined to give her name told CNBC. If anything, there is a risk that with a two-thirds majority for the LDP-led coalition, it "may encourage policymakers to focus on pet projects such as revising the pacifist constitution rather than passing needed structural reforms," Capital Economics wrote in a note before the elections.

According to Nomura, with a solidified LDP power base, the question is whether "it will push ahead more decisively with reforms, or will instead use its enhanced position to prioritize the enactment of right of collective self-defense legislation and constitutional revisions," it wrote in a note. However, with a handful of other elections on the horizon including nationwide local elections in April 2015 and the Upper House election in summer 2016, "There will be a series of events that could weaken the ruling coalition's power base if it presses forward with measures that are unpopular with voters," Nomura said. "We therefore think the Abe administration will probably decide to give priority to exiting deflation by implementing growth strategies, rather than rushing to enact security-related legislation, during the period when important elections will be coming up one after another," Nomura added.

Read More Japan elections:5 things you need to know Market predictions Yasuhide Yajima, chief economist at NLI Research Institute, said on Friday that "the markets have priced in the LDP victory at around 300 seats (and a margin of twenty won't change much). The stock markets may rally for a couple of days but then peter out." What's more interesting, he said, is who Abe picks for his new cabinet. The decision could come as early as next week. In the medium term, Abe's victory would increases the possibility of further quantitative easing from the Bank of Japan to achieve the his economic goals. Coupled with the prospects of a Federal Reserve rate hike next year, this could see the dollar-yen reach 125 and the Nikkei rise to 19,000 by spring, Yajima said. The Nikkei closed at 17,731 on Friday, while the dollar-yen was around 118.80 in late U.S. trading. "If the LDP wins a more convincing victory, then the prospect of Abe remaining in office through 2018 would probably drive up equities and USD/JPY, with interest rates liable to face upward pressure if the yen weakens particularly sharply," Deutsche Bank wrote in a note before the elections. The future of Abenomics Together, Japan's recession and Abe's decision to delay a second sales-tax hike put Abenomics - the series of fiscal and monetary stimulus measures and long-term structural reforms that Abe unveiled in 2013 to kick start Japan's long moribund economy - into question. Thus far, the outcome of Abenomics has been mixed; while the Bank of Japan's dramatic quantitative easing program boosted stock markets and weakened the Japanese yen - making exports more competitive - the central bank is still far from achieving its 2 percent inflation target by next year. In November, core inflation stood at 0.9 percent, excluding the impact of the April sales-tax hike.

Meanwhile, the consumption tax hike, designed to reduce the country's massive public debt, has also seemingly backfired by hampering the economy's fledgling recovery. The economy shrank an annualized 7.3 percent in the second quarter and 1.9 percent in the third. Analysts and investors continue to debate whether Abe's effort will pay off. In early December, credit ratings agency Moody's cut its rating on Japan's government debt by one notch to A1 citing increased uncertainty over whether Abe can achieve his deficit-cutting goals and the timing and effectiveness of growth-enhancing policy measures. Last week, credit ratings agency Fitch said it expects to downgrade Japan's credit rating sometime early next year as the government is unlikely to compile a budget for the next fiscal year that offsets a delay in increasing the sales tax. With a fresh mandate, the prime minister will likely test the idea that there's 'no gain without pain.' Time will tell whether Abe's effort pays off.

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