This may be the election that Japan bears such as Kyle Bass have been waiting for.
Hedge-fund managers betting against Japan in recent years, including Bass of Hayman Capital Management, are counting on a doomsday scenario: a widening trade deficit, a plunge in the yen and a devastating surge in yields in Japan's US$12 trillion bond market. Bass made US$500 million from the US housing market meltdown. Will his team be right about Japan?
Time will tell, of course, but the return of Shinzo Abe's Liberal Democratic Party (LDP) after the December 16 election might nudge Japan closer to a winning hand for the likes of Bass.
No, Japan isn't the next Greece. Japan's household savings exceed the size of the government bond market, with more than 90 per cent of the national debt held domestically. That minimises the risk of a run on yen assets and offers Tokyo a huge cushion that Greece lacks.
But Abe's economics will probably put Japan on shakier footing. Its duel tenets - aggressive fiscal and monetary stimulus - are right out of the playbook the LDP honed over more than a half-century of rule before being tossed out of power in 2009. Only this time Abe plans to push into the kind of uncharted territory that may unnerve investors and credit-rating companies.
That isn't the conventional take at the moment. Markets are abuzz with expectations that Abe will follow through on his pledge to rewrite the Bank of Japan's charter. He would replace BOJ governor Masaaki Shirakawa with a monetary yes-man and demand a 3 per cent inflation target with the goal of ending deflation. Abe would reopen the public-works spigot at a time when Japan should be trimming debt.
In another time and place, this might make sense. But Japan is in far worse shape today than it was in 2006, when Abe had his first crack at prime minister. He inherited an economy experiencing its longest expansion in 60 years, thanks to the reforms of predecessor Junichiro Koizumi. When Abe stepped down 12 months later, the revival was over.
Why voters would give Abe a second chance is beyond me. His party amassed the world's biggest debt among developed nations, created a huge property and stock market bubble and failed to figure out a way to escape the inertia that followed.
The nation of 127 million people voted the LDP out of office three years ago, finding it guilty of these sins and countless others. It turned to the Democratic Party of Japan (DPJ) to plot a new course and give two-party politics a try. Now, voters seem ready to return to the familiar.
The DPJ hasn't covered itself in glory: three prime ministers in three years, another recession under way and a clumsy effort to rebuild the northeastern cities and towns devastated by the 2011 earthquake and tsunami.
But the LDP's anachronistic ways will be set against a fast-changing global backdrop. Fiscal and monetary easing are Band-Aids that treat the symptoms of Japan's slump, now in its third decade, not the causes. Deregulating industry, reducing trade barriers and encouraging innovation would do more to fuel growth than building new roads or ordering the Bank of Japan to print yen.
Japanese people have to rank as the world's most cautious voters. Many now seek a return to the political party they became comfortable with during decades of one-party dominance. Little do they know the real winners could be hedge funds betting against Japan's future.
Lai See is on holiday