Has Japan’s Revolving Door Returned?

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Last Friday, Japanese Prime Minister Yoshihide Suga surprised many financial commentators we follow, announcing he won’t seek re-election as Liberal Democratic Party (LDP) chief almost a year after taking office. Hence, the country will get a new prime minister shortly after 29 September’s party vote—with the victor likely leading the LDP into the general election, due by 28 November. Japanese equities jumped, with many observers we read suggesting a more charismatic leader who champions additional fiscal stimulus could help reduce Japanese shares’ huge lag versus the world. But we think that oversells it. This shift is likely to prove little more than a personality change, and it could signal the return of Japan’s revolving door—a reference to frequent leadership change in Japan in which eight prime ministers led the country between 2006 and 2012. The ouster of an unpopular leader could perk sentiment some short term, but we doubt this does anything material for Japan’s longer-term fundamentals.

In explaining his decision, Suga cited the country’s struggles with the Delta variant, claiming he couldn’t simultaneously campaign for the leadership post and do his job running a country facing a crisis.^[i] That is a sensible-sounding rationale, but most observers we follow think the actual explanation is simpler: Suga’s approval rating is … bad. When he took office following long-tenured Shinzo Abe’s resignation on health grounds last September, Suga’s cabinet was actually quite popular. According to broadcaster NHK, its approval was 62% immediately after appointment.^[ii] We observed other polls put it even higher, hovering near 70%. Suga is the son of a strawberry farmer and hails from the rural north, not Tokyo. He put himself through college by working at a factory before entering politics, giving him a particular man of the people appeal.

However, that initial shine faded fast. Suga was an ardent champion of the country’s efforts to restart domestic tourism under a program called, Go To Travel. This program, unveiled in July 2020, offered substantial discounts and subsidies for Japanese residents to travel domestically. The thinking behind the program: With international borders closed, Japan’s huge international tourism sector would suffer. Suga and other Go To Travel champions thought it would spur domestic tourism and bolster economic activity in the process. At the time, it was slated to expire in March 2021. As summer turned to fall and eventually fall to winter, COVID cases ticked higher, which many experts we read tied to the travel program, leading some critics to darkly dub it, Go To Hospital or even, Go To Heaven.^[iii] Suga rejected these assertions and even backed an extension of the program on 8 December. But when cases spiked the following week and his government’s approval rating tanked, he reversed course and suspended the program.^[iv]

In February, as Japanese COVID cases receded some, news broke that Suga’s son, who works for a private telecommunications firm, was involved in improperly wining and dining 11 LDP officials, a violation of government ethics laws. Then came the Olympics, a divisive issue in the country. Suga pressed for them to continue despite broad opposition amidst the country’s slow vaccine rollout. So when the Delta variant came and cases across the country surged, his cabinet’s popularity suffered even more. In August, NHK reported just 29% of Japanese approved of its performance.^[v]

Based on our research, a 29% government approval rating two months from a general election would imply a high chance of the opposition taking power in most developed countries. But that doesn’t appear to apply in Japan, where the LDP still dominates all other parties. We have seen polls show somewhere on the order of 30% – 35% of voters support the LDP. They could have lost seats in the House of Representatives—the lower house of the Diet, Japan’s legislative body—but with no other party polling in double digits, the LDP would likely remain the senior party in a coalition government.

The bigger question, based on our following of this election, was whether Suga would retain power or fall. For weeks, the widespread presumption we observed was Suga would try to hold on, likely by calling for an early general election ahead of the leadership vote or reshuffling the cabinet. In theory, a good showing in a national vote could have bolstered his support within the LDP. But now it seems clear that won’t happen—his political popularity simply fell too far.

Furthermore, based on our research of developed world politics, a sitting leader surprisingly announcing they won’t seek the post anew amidst a national emergency would stir uncertainty, hit sentiment and likely hurt equities. But in Japan, we have seen market observers argue this is an opportunity. Many analysts we follow think a new, more charismatic, possibly younger leader could renew efforts to reform Japan’s long languishing economy and deploy vast fiscal stimulus, echoing Abe’s 2012 – 2013 Three Arrows economic revitalisation campaign. Some experts we follow were already dissecting the possible cast of characters for the leadership contest just after Suga’s announcement, claiming this underpinned Japanese shares’ jump last Friday after lagging badly for most of 2021. (The MSCI Japan is currently up 6.4% this year, 11.3 percentage points behind the MSCI World.)^[vi]

In a country with sentiment as deeply depressed as this, seeing a very short-term jump based on a flicker of optimism doesn’t shock us. But the reality is, nothing fundamental has really changed, in our view. Japan has had no shortage of fiscal stimulus in recent years. The country has enacted multiple extra budgets totalling hundreds of billions of pounds in an effort to stimulate growth just since COVID began.^[vii] That doesn’t even account for vast measures under Abe and earlier. We think Japan’s experience illustrates fiscal stimulus not being assured to work as planned.

As for economic reform, Abe had some success at the margin, but he failed to advance many others targeting less protectionism and more economic dynamism. This was the longest-serving prime minister in Japan’s history—the man who stopped the revolving door. If he couldn’t push through sweeping reforms, we are sceptical a newcomer would fare better.

Ultimately, Japan’s impending change at the top isn’t a game changer for equities, in our view. We still expect domestically oriented Japanese firms to lag, even if it isn’t as extreme as we have seen over the past few months. Whilst we don’t suggest ignoring the country, as it can offer valuable diversification opportunities, we think its export-orientated firms are better positioned.