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Japan’s Liberal Democratic Party (LDP) confirmed now-former Chief Cabinet Secretary Yoshihide Suga as its new president on Monday, paving the way for him to succeed Shinzo Abe as prime minister when the legislature votes on Wednesday. Aside from introducing a bit of political uncertainty over the potential for a snap election, we think the appointment mostly extends the status quo for Japanese politics—and politics’ influence on the country’s economy and equity markets.
Most of the news commentary on Suga we have seen focuses on his somewhat unusual background for a high-ranking politician in Japan. Unlike every other prime minister in the past two decades, he doesn’t come from a prominent political family. Rather, he comes from a rural town where his father was a strawberry farmer (yum) and his mother a school teacher. He worked at a cardboard factory to put himself through school. He is also famous for his love of pancakes, sit-ups and a morning walk. However, our research shows equity markets generally don’t care whether a country’s leader has a sweet tooth or a strong core—policy is what matters, and on that front, we think Suga is likely to continue his predecessor’s initiatives. As cabinet chief, he was not only Abe’s personal fixer—the guy who corralled the vast bureaucracy—but also reportedly the architect of Abe’s economic initiatives. Therefore, we think it is unlikely the government will suddenly begin lobbying the Bank of Japan to let up on its asset purchases, which aim to boost the economy by keeping long-term interest rates close to zero. Public spending plans probably won’t change much, either, in our view. Suga has suggested a third consumption tax hike to address Japan’s public deficit and debt, but for now, based on several policymakers’ public comments, the government’s chief priority appears to be shepherding an economic recovery whilst managing COVID-19. In our view, a tax hike would likely not help much on this front.
As for economic reforms, it would surprise us if there was much change from the past few years. When Abe took office, he made several sweeping pledges related to corporate governance, labour market reforms, corporate taxation, immigration and increasing women’s role in Japan’s workforce. Some reforms did come to fruition in the ensuing years, but not all of those Abe touted when he took office. We think one big reason for this is that Abe spent much of his political capital on a lengthy, persistent effort to amend Article 9 of Japan’s constitution, which renounces warfare as a sovereign right. Suga’s background makes us doubt he pursues this aim with anything near Abe’s vigour. As many Japanese historians have documented, Abe’s dream of restoring Japan’s military might ties back to his grandfather, who served in Hideki Tojo’s cabinet and later as prime minister in the late 1950s. Based on the many reports of public backlash we have reviewed, we think pursuit of a constitutional amendment ultimately eroded Abe’s popularity and political clout, preventing him from accomplishing many major items on his economic reform to-do list. We doubt Suga will continue that particular distraction to that extent, but it wouldn’t surprise us if COVID-19 similarly dominated policymaking over the foreseeable future.
Further complicating matters, Suga is only serving out the rest of Abe’s term as LDP president, which expires in September 2021. In our view, that gives party heavyweights a lot of incentive to avoid passing anything huge, lest they alienate the rank and file—particularly since rank-and-file party members didn’t get a vote on Suga and his competitors, one of whom is reportedly quite popular with the LDP grassroots.
We think that looming party leadership vote is one source of political uncertainty, as it may restart Japan’s infamous revolving door of prime ministers—before Abe took office (for the second time) in late 2012, Japan had six prime ministers in six years. Another source of uncertainty: Japan’s next general election is due by October 2021. Suga could run out the clock and hope to fight a successful one-two punch next autumn. But based on our review of Japanese news sites, he is also enjoying a newfound popularity surge thanks to the aforementioned pancake obsession and other endearing traits. Most Japanese political observers we follow suspect he will try to consolidate that popularity by calling a snap election next month. Ordinarily we think that would be a very safe assumption, but a COVID resurgence could complicate that. As ever, investors will have to wait and see.
Based on how our research shows political developments normally impact equity markets, election chatter and its associated uncertainty could weigh on investor sentiment for a spell and perhaps spur market volatility, but policy-wise we doubt it changes much. With the LDP’s main opposition dealing with some internal shuffles and facing low polling numbers, it appears highly unlikely to us that an election later this year would bring a changing of the guard.[i] So eventually, we think uncertainty is likely to fall and Japanese equities’ general comfort with the status quo is likely to continue. That doesn’t mean we are hugely positive on Japanese shares, which we think are likely to remain handicapped by relatively weak domestic economic fundamentals. But political risk appears likely to remain low, which we think benefits the largest, most globally connected Japanese companies.
[i] “65% Have Low Expectations for Post-Merger Opposition Party in Japan: Poll,” Takahiro Hirata, Mainichi Japan, 9/9/2020.
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