At 21,696.65, the Nikkei 225 closed at its highest in two decades on Monday following Japanese Prime Minister Shinzo Abe’s weekend victory.

‘I think it is a positive surprise for those investors who thought that Abenomics was dead,’ said Takashi Maruyama, Japan CIO of Fidelity International.

‘I think this result reflects the fact that many people are basically satisfied with everyday life in Japan. Most Japanese people appreciate the progress of Abenomics.’

Investor sentiment for Japan was hit in the third quarter, but foreign investors became net buyers in September, ignoring scandals related to Kobe Steel and Nissan.

Japan went to the polls on Sunday after Abe called an election a year early amidst opposition disarray, resulting in a two-thirds majority for his Liberal Democratic Party and Komeito in the lower house.

Abe-Kuroda regime

Market participants are expecting a re-election of Bank of Japan governor Haruhiko Kuroda in April 2018 following Abe’s win. He has been the governor at Japan’s central bank since March 2013.

‘The likely reappointment of Mr. Kuroda at the BoJ should be seen as yen weakening,’ Ronald Slattery, portfolio manager at Fidelity International said in a note on Monday.

‘In addition, the market today will be moved by the developments in the US at the end of last week that caused a large jump in the US Treasury yield.’

Lombard Odier’s Asia macro strategist, Homin Lee, also expects the Abe cabinet to support dovish leadership in the Bank of Japan.

Consumption tax hike

The victory has sealed the hike in consumption tax to 10% from the current 8%, which is expected in October 2019, according to investors.

Japan’s GDP has been rising for six consecutive quarters and its unemployment rate fell to 3%, a multi-decade low, in July. The Bank of Japan is forecasting GDP to rise to 1.4% in 2018. Abe will likely use a stronger economy as a reason to hike taxes.

The government wants to offset the measure by investing in free early childhood education. However, Lee is sceptical of the positive economic impact of the measure.

‘The promised supplementary budget that will follow the election is smaller than the estimated revenue windfall (roughly JPY 5 trillion) from the tax hike. Thus, there will still be modest fiscal tightening,’ he said.

Constitutional amendment

Abe has been trying to revise the pacifist clause of Japan’s constitution since his first term as prime minister, which began in 2006, and the continued majority could give his campaign a much-needed boost.

‘Revising the country’s unique pacifist constitution has been the long-term objective of nationalist forces that underpin the LDP, and growing threats from North Korea has added more urgency to the project,’ Lee said.

The prime minister wants to revise Article 9, which renounces war, with an amendment that would legitimise the existence of the Japan Self Defense Forces. However, amendments to the constitution need to be approved by two-thirds of each chamber of parliament and then by a simple majority in a national referendum, so he will have to continue to tread carefully.

Nuclear politics

The reactivation of reactors no.6 and no.7 at the Kishiwazaki-Kariwa nuclear plant in Niigata is another potential result of Abe’s victory.

The nuclear issue has been extremely divisive in Japan after the Fukushima disaster in 2011. Abe’s cabinet has been encouraging a return to nuclear power-generated electricity, setting a target of 20-22% of electricity from nuclear sources by 2030.

‘Unfortunately for Abe, the public opposition is unlikely to go away any time soon even if the economic case for restarting these reactors is strong,’ Lee added.