Japan’s outgoing political leader Fumio Kishida may not be a “revolving door prime minister” by the short-term standards of some of his predecessors. But although he has been in office for nearly three years, his intended exit does raise afresh the issue of policy continuity.
What will happen to the “new capitalism” he has espoused for the country, and will his ambition to make Japan a “nation of investors” fall by the wayside once he departs next month? These questions matter, particularly to asset managers.
Kishida’s departure, which will follow the LDP presidential election, has not been triggered by problems with his stewardship of Japan’s economy but by his electing to “take responsibility” for an LDP political funds scandal for which he was not directly responsible.
The historical strength of the Japanese bureaucracy in relation to that of the shifting political establishment means it’s likely that the market-oriented reforms set in motion under Kishida and since enshrined in official policy will continue.
But the recent extreme swings in share prices, along with concerns about rate hikes and a stronger yen, may undermine reforms like the permanent tax concessions on contributions to the Nippon Individual Savings Accounts that have helped give stock investment a mass following in Japan.
Kishida’s successor – and the field of actual and potential candidates remains crowded at this stage – will have some tough issues to deal with on both the economic and financial fronts.
There are roughly a dozen leading candidates, including Taro Kono, the digital transformation minister, Yoshimasa Hayashi, the chief cabinet secretary, Yoko Kamikawa, the foreign minister, and Shigeru Ishiba, former secretary general of the ruling Liberal Democratic Party (LDP). But few among them are obviously qualified to exercise the leadership needed to deal with the tough issues.
Not all of them will secure sufficient votes from members of parliament and party members to qualify in the final voting for presidency of the LDP and the premiership. But the sheer number of candidates highlights the beauty contest nature of the event.
Market uncertainty
One legacy of Kishida’s term which will likely dog the economy even after he steps down will be his pledge to double defence spending, largely at the behest of the US. Among Kishida’s would-be successors, only Ishiba is likely to challenge this commitment.
The sweeping defence spending gesture may please the US administration but it is so far unfunded. The burden may be placed on taxpayers directly via a tax hike, or indirectly through increased government borrowing.
This argues in favour of keeping interest rates high enough to attract domestic and foreign investment into Japanese government bonds, which has implications for both the bond and stock markets.
A further increase in interest rates which Kazuo Ueda, governor of the Bank of Japan, hinted at strongly when the central bank surprised markets last month with a modest 0.25% hike, could slow the recent shift of savings from bank deposits and cash into stocks.
Thus the outlook for the Nikkei 225 stock average, which broke above 41,000 roughly a month ago to a record high before sliding back near 38,000, is clouded with uncertainty. Economic factors will influence where the market goes under a new prime minister but without Kishida as a cheerleader, it may struggle to dazzle, at least in the short term.
Perhaps what both domestic and foreign investors have most to fear is not so much stock or bond price volatility, or even the course of the economy, but continuing political instability and policy discontinuity. Voters’ distrust in politics is high and even Kishida’s sacrificial gesture may not assuage that.
