The crushing election victory of Shinzo Abe in Japan is viewed as a potential inflection point for its economy, a shift by voters that will impact the direction of fiscal policy. Investors are being urged to take note.

It’s not the return to power of Abe’s Liberal Democratic Party (LDP) that startles, so much as the margin of victory: 294 seats in the 480-member lower house of parliament, or 61% of the vote.

Along with the 31 votes of LDP partner New Komeito, the coalition will have a two-thirds majority that will allow it to override most decisions of the upper house, which is currently controlled by the former ruling Democratic Party of Japan (DPJ).

This landslide is a ringing endorsement for the policies that Abe set out on how the economy should be run in future, in particular increased infrastructure and defence spending and a weakening of the yen, says John Vail, chief global strategist for Nikko Asset Management in Tokyo.

Evidently geopolitical factors were also at play, with Abe taking an uncompromising line over a disputed island chain in the East China Sea controlled by Japan but claimed by China and Taiwan. A move by Japan in September to purchase the islands from a private Japanese owner incensed Beijing and sparked riots and looting of Japanese shops and restaurants in China.

“It stiffened the spine of the Japanese people to a large degree,” says Vail. “They are tired of the status quo, and are voting for change in a more aggressive direction for the country that involves risks to the status quo, which they are willing to jump behind. People who do not live in Japan do not understand the major change in sentiment here. It is important to realise this.”

Vail expects the election result to bring Japan closer to the rest of Asia ex-China as it moves the concentration of its overseas investment away from China towards the rest of the region.

But he plays down the risk of escalation in the conflagration with China, saying Abe will be more interested in maintaining the status quo and that both sides will want to avoid incendiary developments.

“The safest thing is to assume that the status quo will continue,” he adds. “Although there will be some obstacles ahead, I think the worst is over in that regard.”

Vail expects Abe’s incoming government at least to be more stable than recent predecessors, with Japan having had seven prime ministers (including Abe previously) over just six years.

But the appointment of new Bank of Japan leadership in March and April 2013 for a five-year term looks set to be a key turning point as it embarks on a systematic weakening of the yen.

“I have never in the history of Japan seen one item so unanimously agreed upon,” says Vail. “In the past there was always someone saying a strong yen was good, but you don’t hear anybody saying that now.”

He notes the yen has been so unbearably strong for so long that it has hollowed out Japan to a large degree. But the intention of Abe is to bring about change via a more dovish BOJ leadership over a five-year term.

“The world has been ignoring Japan for quite some time saying it is never going to change, but let me assure you this time is different,” says Vail. “The winds of change are really strong.”

He reckons the BOJ could look to change laws and establish a formal inflation target. Nikko AM expects the yen to weaken to ¥87 to the US dollar by June 2013.

The fund house’s September forecast for a stock rally did not materialise amid disappointing third-quarter earnings results. But the landslide election victory has bolstered its view.

Nikko AM is now predicting that the Tokyo Price Index (Topix) on the Tokyo Stock Exchange will hit 899 by June 2013, from 819 yesterday, and that is itself a rally from 722 at close on November 13.

Vail notes that the weakening of the yen versus dollar, euro and won should raise company confidence in terms of increasing capital expenditure domestically, which would be positive for earnings and sentiment.

On valuation grounds, he notes that stocks are trading at an average of 13-times 12-month forward earnings, against a 10-year historical average of 17x.

While he concedes that a weakening yen will benefit domestic and not international equity investors, he argues that the effect should be viewed with a long-term lens.

“If this really is a major change, an inflection point, once the currency weakens to a proper level and if it can stay at around ¥90 to the dollar, it will continue to improve the economy and corporate profits,” he notes.

“Over the longer term you could see Japan doing reasonably well as an equity investment.”