What if Abe’s election gamble doesn't pay off?

Supporters of the ruling Liberal Democratic Party (LDP) at a rally as Prime Minister and ruling LDP leader Shinzo Abe delivers a campaign speech at Omiya, suburban Tokyo on December 9, 2014
Yoshikazu Tsuno | AFP | Getty Images
Supporters of the ruling Liberal Democratic Party (LDP) at a rally as Prime Minister and ruling LDP leader Shinzo Abe delivers a campaign speech at Omiya, suburban Tokyo on December 9, 2014

While Japan Prime Minister Shinzo Abe's gamble on calling an early election is widely expected to end in a respectable, if not landslide, victory, some analysts are concerned about what may happen if apathetic voters don't show up at the polls.

"Financial markets would perhaps respond by driving interest rates and the yen higher and equities lower in a reversal of recent trends" if Abe's party falls short of the victory bar, Makoto Yamashita, a strategist at Deutsche Bank, said in a note this week.

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That "victory bar" is difficult to define, he noted. Analysts are watching for whether Abe's LDP party and coalition partner garner at least a 270 seat "absolute stable majority" of the total 475, compared with the current combined 326 seats they hold.

Since the victory bar can be hit with the LDP still losing around 20 percent of its current seats, "Abe might see his internal power base shaken to at least some degree," Yamashita noted.

Calling odds

Last month, Abe dissolved the lower house of parliament and called a snap election scheduled for Sunday, despite meeting with little opposition for his plan to delay a second sales tax hike by 18 months after data showed the country fell into recession in the third quarter.

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Analysts believe Abe called the election in part to buy more time for his plan to kickstart the country's long-moribund economy, dubbed Abenomics, to work and to quiet opposition within his own party.

It's a gamble the prime minister is widely expected to win, with opposition parties largely in disarray. But economists are poised to cut the outlook for the country if either the "victory bar" isn't hit or if Abe's party doesn't manage a simple majority.

Societe Generale assigns a 20 percent probability to the first scenario and a 10 percent probability to the second.

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If there's no absolute majority, "Abe then could be forced to compromise on structural reforms and there would be a risk that his power to promote reforms would weaken. Moreover, this could threaten Prime Minister Abe's reflationary policy, as some members in LDP are hawkish on promoting fiscal reform mainly through tax increases," the bank said in a note last week.

In this scenario, Societe Generale still expects 2.1 percent gross domestic product (GDP) growth in fiscal 2015, but the following year it would fall to 1.75 percent.

But if the prime minister's coalition loses the simple majority of seats, "Abe would likely resign, and this would be the end of Abenomics policies,"Societe Generale said. It expects this would also lead the Bank of Japan to taper its quantitative easing programs early and reform legislation would be very difficult to pass.

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"There would be a higher risk that the Japanese economy would fall into a diminishing equilibrium. This would mean a return to a deflationary environment," Societe Generale said, adding it would cut its fiscal 2015 and 2016 GDP outlook to 1.5 percent and 1.0 percent respectively.

Musical chairs

Others are also concerned about how the seat tally comes up might affect Abenomics' prospects, including the monetary easing that has helped to drive recent market advances.

"If the ruling coalition were to lose a large number of seats in the election, the Bank of Japan would probably see this as an indication of strong public criticism of Abenomics, including the BOJ's bold monetary easing measures," Nomura said in a note Tuesday. "This might therefore make further monetary easing less likely."

Around 85 percent of respondents in the November Nikkei Quick monthly bond survey expect interest rates to rise if Abe's coalition comes up short, 85 percent expect equities to fall and 63 percent expect the yen will strengthen, Deutsche Bank said in its note.

—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1