Asian leaders retain power; questions surround central banks

Asian leaders retain power; questions surround central banks




Asian leaders retain power; questions surround central banks

by Kristina Hooper, Global Market Strategist, Invesco Ltd., Invesco Canada

The last 18 months have seen a rejection of the status quo in multiple elections, from the Brexit vote to the U.S. presidential election to the recent Catalonia vote. Last week, we saw the U.S. and U.K. continue to work through the changes stemming from their elections – and we saw one key region buck this trend and embrace the status quo as the way to move forward.

Below, I discuss four key themes from the headlines last week.

1. Embracing the status quo while moving forward

Japanese citizens voted emphatically for the status quo with Prime Minister (PM) Shinzo Abe. PM Abe’s decision to call snap elections in October brought back memories of U.K. Prime Minister Theresa May’s ill-fated decision to hold elections last spring. However, the outcome in Japan could not have been more different than the one in the U.K. – PM Abe won a resounding victory, which translates into a mandate for his agenda going forward. And that agenda is an ambitious one, largely focused on the economy. It would mean a continuation of ultra-accommodative monetary policy. In addition, PM Abe intends to implement a consumption tax but, rather than use the proceeds for debt reduction as originally had been planned, he would like to use some of the revenue to support education and elder care. He also wants to expand Japan’s military capabilities. Recall that after World War II, Japan was forced to relinquish its traditional military and instead rely on its allies. But today, when allies such as the U.S. might be less reliable, that arrangement presents a difficult situation for Japan – particularly given growing aggression from North Korea. It makes sense for Japan to want to build its military – particularly nuclear capabilities. We could see a similar reaction from South Korea. However, such moves will likely be opposed by China, which would like to maintain the status quo militarily in Asia.

In related news, the 19th National Congress of the Communist Party in China opened last week and, as expected, there were important developments for China. First and foremost, President Xi Jinping hinted that he would like to continue as the leader of China beyond the end of his term. He is clearly consolidating power. So in terms of leadership, the status quo may last longer than expected – but that doesn’t mean that President Xi will be looking backward. In fact, he plans to embark on a period of change for China – a “new era” that will achieve the “Chinese dream.” In echoes of Maslow’s hierarchy of needs, where the most basic needs are satisfied then humans move on to higher-minded needs, China is focusing on higher-minded needs such as fairness, justice, security and the environment now that basic economic needs have been met. President Xi shared a two-stage development plan for the future. By the end of the first stage, expected to last from 2020 to 2035, China plans to have a strong rule of law in place as well as global influence – and is expected to be a global leader in innovation. In the second stage, China is expected to become more prosperous and culturally advanced – and an even more powerful force in the world.

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