Fumio Kishida, Japan’s new prime minister, will champion the continuity and consensus-driven politics favoured by his ruling Liberal Democratic Party (LDP).
Kishida recently became the country’s leader following a LDP vote after Yoshide Suga, the former premier, decided not to run for re-election.
His consensus-based approach to leadership may appease the country’s risk-averse political elites, but it may also complicate the decision-making process at a time when the country is fighting Covid, as well as trying to emerge from chronic deflation. However, investors will welcome the business-as-usual message that his selection represents. This will help support equities, alongside other more fundamental factors.
Here’s a breakdown of what to look out for under a Kishida premiership:
Fiscal policy — a "virtuous cycle of growth and wealth distribution"
Expect the announcement of a stimulus package soon. Estimates are for more than 30 trillion yen (US$266 billion), or some 5.5% of gross domestic product (GDP), which will be financed through the issuance of new Japan Government Bonds.
Despite these headline numbers, the overall scale of the package is likely to be more modest as new financial commitments are likely to be in the realm of just 1%-2% of GDP.
There will be measures to support people suffering from Covid-19, as well as a pledge to maintain the current consumption tax rate of 10% for the next decade. Kishida favors redistributive economic policies to support middle-class voters. Initial plans to revise taxes on capital gains and dividends to fund these policies caused market jitters, and he was forced to clarify that there are no plans for immediate changes.
Deregulation has been blamed for increasing social and financial inequality. That’s why the structural reforms favored by former premiers Suga and Shinzo Abe, may become less of a priority under a Kishida administration.
You should take his commitment to achieve a balanced budget by 2025 with a pinch of salt as a similar pledge by Abe was quietly shelved and forgotten.
Monetary policy
The new prime minister seems set on continuing with Abenomics — an economic revitalization plan associated with Abe — until Japan exits deflation. This means maintaining the current policy of monetary easing and a 2%-inflation target.
But Kishida has also stressed that the Bank of Japan (BoJ) needs to engage in a proper dialogue with markets. There is some ambiguity over his stance on the leadership of the BoJ once Governor Haruhiko Kuroda’s term ends in April 2023. Initial signs suggest that Kishida favors a dovish successor who will support easy monetary policy.
Energy, digitization
Kishida remains committed to a carbon-neutral target and sees nuclear power as a green energy option, with plans to invest in nuclear, hydrogen, compact electric furnaces and similar energy sources.
He favors restarting existing nuclear power plants after confirming the safety of generation facilities, as well as the construction of new reactors over the medium term.
Kishida will likely continue with Suga’s strategy of digitization of the government and the country’s Green Growth Strategy. Some 15 trillion yen has also been earmarked for disaster preparedness.
What does this mean for stock markets?
The impact should be largely neutral if it’s business as usual. On the Covid front, about 60% of the population are now fully vaccinated and the Delta wave is finally under control.
In the coming months, Kishida’s government will focus on reopening the economy and restart the Go to Travel campaign which promotes domestic tourism. This sets the stage for a gradual normalization of activity over the next six-to-nine months that should bode well for risk assets.
Looking ahead, stock market reaction to politics will likely remain muted following the cabinet reshuffle and policy statement speech. Fundamentals could provide further market support.
The next big political event would be lower house parliamentary elections in November. A "positive" outcome hinges on the government winning a simple majority that will give them a mandate to rule for the long term.
Our base-case scenario is for the LDP to win the upcoming national election, even though it may lose some seats. Falling Covid cases and rising vaccination rate should help them.
If history is any guide, a LDP majority in parliament would boost equities, while its impact on the yen would be largely neutral.
What are the risks for investors?
One risk is for Japan’s corporate governance reform push to lose steam with the "triple win approach." This aims to shift company attention away from shareholders toward broader stakeholders and business partners. However, it’s too early to decide before more details emerge.
Another risk is if the LDP loses its majority in parliament, which could lead to market volatility. Recent opinion polls suggests that support for the LDP has improved since Suga’s departure and is much higher than for the opposition. However, Kishida’s approval rating remains lower than initial support for both Abe and Suga and there has also been criticism of his cabinet choices.
And finally..
That said, there remains plenty of support elsewhere for Japan equities. These include a virus, vaccine and reopening tailwind, a strong earnings recovery trend and attractive relative valuation versus developed market peers. What’s more, foreign investors are under-invested in this market; the yen is weak and stable; and there has been structural improvement in corporate governance. Barring any major shocks, such as US Federal Reserve tapering and/or the LDP losing the lower house election, recent market weakness may prove to be an opportunity.
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