Editors’ Note: MarketMinder Europe favours no politician nor any party. We assess political developments for their potential economic and market impact only.
The world continues digesting last week’s major political earthquakes, with the Conservative Party’s leadership contest kicking off and Japanese Prime Minister (PM) Fumio Kishida reportedly eyeing a cabinet reshuffle in the wake of Sunday’s upper house election and former Japanese PM Shinzo Abe’s tragic assassination. We have seen a ton of speculation from commentators we follow as to how these events will potentially affect economic policy in the months to come, particularly in Japan, given Abe’s history as the architect of his Liberal Democratic Party’s (LDP’s) economic policy. Whilst it might feel trivial to focus on this aspect rather than the gravity of the tragedy, we have long found markets to be pretty laser focussed on policy, not the social and human angles. So let us look at the latest political developments through that lens.
In the wake of the tragic assassination—and, as widely expected—the LDP and its coalition partner, Komeito, took the vast majority of seats up for election on Sunday.[i] That gives them a super majority in both houses of Japan’s legislature and, following Abe’s death, most commentators we read are focussed on what this means for the revision of Japan’s constitution. Article 9 of the constitution, which American officials drafted with the country’s consent following World War II, renounced the right to sovereign warfare and a standing military. Abe, whose grandfather served in Japan’s wartime government, pushed for an amendment of this article throughout both of his stints as PM (first in 2006 – 2007, then from 2012 – 2020). That endeavour was something of a lifelong ambition, based on his many interviews and even old school papers on the topic, and he frequently argued rewriting the article to enshrine Japan’s Self Defense Force into law was necessary to strengthen and protect his country as China’s navy grew more active in the region.
As a result, in the assassination’s aftermath, Kishida vowed to press forward in Abe’s memory and see it through. Given constitutional amendment requires a two-thirds vote in both chambers and a popular referendum, many observers we follow portray the revision as a done deal, weighing what it means for international relations and global economic ties in the 21st century. We have also seen commentary couching Abe’s free trade push in this light.
This is obviously a very delicate sociological issue in Japan, especially given the constitution and Article 9’s background. But we are confused by the amount of attention paid to it in economic circles. For one, it isn’t clear to us that the likelihood of revision actually increased over the weekend, given Komeito is a pacifist party that has paid only the loosest of lip service to discussing constitutional amendment. It softened its position a little bit after Vladimir Putin invaded Ukraine, but not materially.[ii] It also favours amending Articles 72 or 73 of the constitution to enshrine the legality of the Self Defense Force in law, not Article 9. [iii] That may seem semantic but could be a very big roadblock. Lastly, the LDP is actually a loose confederation of factions that, in other countries, could very well be separate political parties, and some appear more enthusiastic about revision than others. If polls throughout his tenure were any indication, Abe had unbelievably high political capital and still couldn’t get it through—it isn’t certain to us that Kishida can ride the wave of posthumous affection for the fallen leader to complete the mission.
But also, we think commentators are wrongly tying constitutional amendment up with Abenomics—the three-part strategy of (alleged) monetary easing, fiscal stimulus and economic reform that Abe spearheaded and Kishida has positioned himself as caretaker of. We do think they are linked, but not in the way we have seen some argue retrospectively. In our many years observing and analysing Japanese economic policy, we observed that whilst Abe reportedly viewed economic revitalisation as key to garnering support for constitutional revision—and reforms as key to that revitalisation—he repeatedly put the cart before the horse, trying to push an amendment forward before reforms were complete. Every time, we observed it reducing his political capital as members of the public protested constitutional change, and reforms often stalled out as a result. Then he would get out of the rough patch, get back on the economic reform train, get a little more done, then push constitutional change again, lather, rinse, repeat. It seems to us the LDP now risks getting caught up in this same cycle, and the more attention constitutional revision gobbles up, the less attention economic reform seems likely to get, which will likely dash renewed hopes for a revitalised corporate landscape in Japan.
Yet Abe did manage to pass some reforms that, though short of what he initially proposed, we think are now starting to bear fruit. Completing the privatisation of the behemoth state-run postal service/banking hybrid Japan Post, which had stalled after former PM Junichiro Koizumi left office in 2006, was a major win, in our view. So was getting the corporate tax rate down below 30%, which we think made Japan more competitive with the rest of the world. The recent wave of corporate mergers probably owes in part to Abe’s corporate governance reforms. So does the recent appointment of two activist investors to a major corporation, which would have been unthinkable a decade ago, based on our observations. The landscape probably won’t change overnight, but the framework appears to be in place for markets to force companies to get more competitive by breaking the complex ownership arrangements that preserve conflicts of interest and thwart competition. We don’t think these are the sort of developments that qualify as market drivers in the near term, but the long-term structural backdrop has become somewhat more favourable over the past decade, in our view.
And on a personal note, as stated at the outset of this article, we take a strict neutral, non-partisan approach when covering politics. But we are also human and will occasionally develop a personal fondness for some of the personalities we cover, and we found covering Abe for over a decade to be just plain delightful. He had grit and an infectious grin, he made us laugh and he will be missed.
[i] Source: Japan Ministry of Internal Affairs and Communications, as of 12/7/2022.
[ii] “Pro-Revision Parties Differ on What to Change in Constitution,” Staff, The Asahi Shimbun, 7/7/2022.
[iii] “Junior Ruling Party Komeito Key to Moves to Revise Japan’s Pacifist Constitution,” Staff, Mainichi Japan, 11/7/2022.
Investing in financial markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance neither guarantees nor reliably indicates future performance. The value of investments and the income from them will fluctuate with world financial markets and international currency exchange rates.
This article reflects the opinions, viewpoints and commentary of Fisher Investments MarketMinder editorial staff, which is subject to change at any time without notice. Market Information is provided for illustrative and informational purposes only. Nothing in this article constitutes investment advice or any recommendation to buy or sell any particular security or that a particular transaction or investment strategy is suitable for any specific person.
Fisher Investments Europe Limited, trading as Fisher Investments UK, is authorised and regulated by the UK Financial Conduct Authority (FCA Number 191609) and is registered in England (Company Number 3850593). Fisher Investments Europe Limited has its registered office at: Level 18, One Canada Square, Canary Wharf, London, E14 5AX, United Kingdom. Investment management services are provided by Fisher Investments UK’s parent company, Fisher Asset Management, LLC, trading as Fisher Investments, which is established in the US and regulated by the US Securities and Exchange Commission.