The result of Japan’s recent Upper House election suggests two things: that Japan is more stable politically than other major countries, and that Prime Minister Abe is clearly going to prioritize the economy. Indeed, he commented on the details of his fiscal policies directly after the election, and while he didn’t refer to the scale of the supplementary budget in his comments, the market switched from pre-election expectations of JPY 5 trillion to something closer to the JPY 10-20 trillion level.

New fiscal stimulus measures are likely to include issuing premium shopping coupons, frontloading construction of the high-speed maglev train network, boosting agricultural exports, developing ports for cruise ships, and implementing scholarship grants. While the election result amounts to a vote of confidence for Abenomics overall, this does not mean that we should now expect to see many other policies that have not previously been announced or put into practice. Instead, the market will focus its interest on the progress of policies that have already been initiated.

The Prime Minister issued an order to draft a supplementary budget proposal immediately after the election. The market is, in a sense, bound to hope for short-term economic stimulus that could potentially be generated by one of the few stable governments in the world. On the other hand, expansion of the budget by approximately JPY 10-20 trillion is still subject to the problem of how to fund it, and even with the headline figure of JPY 10-20 trillion, the implementation period may turn out to be unclear, causing a lingering risk of doubt that the policy will have an immediate effect.

Looking at monetary policy, the election result will not likely affect the Bank of Japan (BOJ)’s additional easing. The potential delay in the global economic recovery brought on by Brexit, coupled with the stronger yen’s deflationary effects, will likely oblige the BOJ to take some action, including additional purchases of government bonds, REITs and ETFs at the coming board meeting on July 28-29.

Now that support for amending Japan’s constitution can, in theory, be tallied up to reach two-thirds of the Upper House, the business community has started to demand that the government put economic policy on the front burner. Even if the amendment is approved by parliament, it will need to be put to a national referendum afterwards. As opinion poll results show that Japan’s population is not particularly positive about amending the constitution, it is unlikely that the actual debate will start until the economic environment improves further, regardless of the Prime Minister’s desire to move forward. Furthermore, even if the number of supporters for revising the constitution is sufficient, a unified amendment proposal has not been agreed on, and it will be difficult to reconcile differences of opinion even within the supporting side. The Prime Minister is also aware that his cabinet’s approval rating depends on its economic policies rather than on amending the constitution. Consequently, there is little risk of economic policies taking a backseat, thus causing disappointment in the market.

In sum, the Upper House election result is unlikely to usher in any significant changes beyond large fiscal stimulus measures. Indeed, we are not worried that the Prime Minister will focus on constitutional reform before the economy recovers sufficiently. Even after that, it will take time to initiate the complicated constitutional discussions, even with his alliance partners. For further confirmation of our views in this regard, we will closely observe what kind of message the government puts out with the cabinet reshuffle scheduled for early August.