Japanese stocks surged Friday after Prime Minister Yoshihide Suga bowed out of the upcoming ruling LDP leadership election. Effectively, he resigned.
“It was pretty spare,” someone said, of his press conference. He took just one question. His premiership is over just a year after it began. Shinzo Abe stepped down as Japan’s longest-serving prime minister a year ago last month.
“Since I became prime minister, dealing with coronavirus has been at the center of my efforts,” Suga said. “Dealing with the virus while campaigning for the election would take a huge amount of energy. I realized I couldn’t do both and I should choose one.”
He hasn’t been particularly popular. The Topix jumped to the highest since 1991 Friday (figure below), and some are hopeful the rangebound curse might soon lift.
Japanese equities have underperformed developed market benchmarks in 2021, in part due to what felt, at times, like an inordinately fraught response to the pandemic. Of course, every nation’s response could be fairly described as fraught at one point or another, but Japan’s vaccine campaign was slow by the standards of rich nations and there are lingering questions about the economy.
Tokyo has labored under a rolling state of emergency, and the city’s battle to contain the latest wave of the virus cast a pall over the Olympics which, to some observers anyway, felt surreal — contrived, even.
One bull case involves more fiscal stimulus. Former Foreign Minister Fumio Kishida wants to spend “tens of trillions of yen,” apparently, and Taro Kono, who currently presides over Japan’s vaccination effort, has already begun collecting endorsements.
Among a laundry list of real bonafides, Kono has more Twitter followers than Abe, which I mention only because it speaks to his popularity. Speaking at a press conference on Thursday, Kishida said he wants to set up a health crisis management agency to coordinate policy for infectious diseases. He characterized the government’s economic policies as disjointed and short-sighted.
Some observers struck a cautious tone. Suga’s exit “could effectively mark the end of nearly a decade of Abenomics and while the lure of Fumio Kishida’s promise of ‘tens of trillions of yen’ to control the pandemic may sound appealing to investors, don’t forget what Japanese politics was like before the Abe-Suga era,” Bloomberg’s Gearoid Reidy wrote, adding that “the biggest fear of many analysts is that a premature Suga exit could represent a return to revolving-door premierships.”
Nomura’s Jim McCafferty alluded to the same. “I guess we’re possibly back to the politics we have known in Japan pre-Abe,” he said, in remarks cited by Reuters. “If you look at post-war Japanese politics the average tenure of prime ministers has been a lot less than four years.”
Obviously, traders will be keen on the implications for the BoJ, which long ago cornered the JGB market and is the largest holder of Japanese equities (figure below).
“If there’s uncertainty about the continuity of the policy direction, the market will be very concerned, but at the moment, Japan is in the grip of the pandemic so basically the policy direction won’t change, so I don’t think there’s much impact on the FX market,” MUFG’s Minori Uchida mused.
Markets see it “as favorable that a government that saw its support fall considerably is ending,” an economist at Nomura Research Institute remarked. “Hopes of more effective coronavirus policies are rising and that’s leading to higher stock prices.”
“Regardless of who runs for the party leadership [or] what kind of policy manifestos, the market seems to favor the increased prospect that the current LDP administration will continue stably,” Daiwa’s Toru Suehiro said.
Kay Van-Petersen, a strategist at Saxo, was less constructive. “We can expect fiscal and political gridlock for future administrations,” he said Friday, in the course of suggesting that monetary policy is “all out of bullets and Godzilla has left the building.” (Godzilla is Abe.)
