Another Turn in Japanese and French Politics

Editors’ Note: MarketMinder Europe prefers no politician nor any party. We assess developments for their potential economic and market implications.

Last week, if we told you that between France and Japan, France had a government that appeared to be firming up whilst Japan was a giant question mark, you might well have laughed us out of the room. France seemed stuck in limbo, waiting for President Emmanuel Macron to appoint a new prime minister (PM) amidst threats from all sides to greet the lucky choice with no-confidence votes. Meanwhile, Japan’s presumptive PM, Sanae Takaichi, seemed a lock to renew her party’s minority government, which already seemed to have decent parliamentary support. But now the tables have turned, which we think helps ease uncertainty in France and raise it in Japan. For stocks, we doubt either is a major gamechanger, but seeing the lay of the land can help put short-term moves in context.

France Moves Forward

When last we left France, PM Sébastien Lecornu had resigned but, at President Emmanuel Macron’s reported request, was still working with opposition leaders on breaking the budget impasse so that whoever Macron appointed to replace him wouldn’t immediately lose a no-confidence vote. We saw rumblings at the time that this could lead to Macron reappointing Lecornu. That is exactly what happened. Last Wednesday evening, Lecornu told an interviewer his mission was complete and there seemed to be enough common ground for the next PM to survive.^[i] Thursday, we saw several reports that Macron agreed to suspend his flagship (and deeply unpopular) pension reforms, which raised the retirement age from 62 to 64, in exchange for support from the centre-left Socialist Party. And late Friday, Macron reappointed Lecornu.

Initially, the other party leaders weren’t happy, calling it a joke.^[ii] Before fresh talks even started, the nationalist-populist National Rally (NR) pledged to call a no-confidence vote, and it wasn’t clear that Lecornu could cobble sufficient support for his premiership to survive.^[iii] But then he unveiled a new cabinet, this time a group of technocrats that seemed more palatable to the Socialists than the prior would-be cabinet. And, in his first speech to Parliament, Lecornu announced the pension reforms would indeed be suspended until after 2027’s presidential election.^[iv] In response, the Socialists said they wouldn’t support a no-confidence vote, and true to their word, they supported Lecornu in two no-confidence votes held Thursday—one called by the NR and one called by the leftist France Unbowed.^[v]

And so, surpassing seemingly the entire world’s expectations, France appears to have a government. The budget still isn’t done, so this government’s staying power isn’t assured, leaving some uncertainty yet to fall. But compromise with the Socialists seems a solid first step, and we see at least a pathway to a fiscal policy plan that can squeak through. It may not have enough austerity to satisfy those who focus on France’s budget deficit, but we think a broad, watered-down compromise would likely buy some time on the political front, calming markets’ jitters in the short term.

The larger benefit we see for stocks may be easing the immediate political dread. During last week’s interregnum, when the NR and France Unbowed were calling for Macron’s resignation, we saw constant warnings throughout commentary we follow that France’s political crisis would wreak havoc on stock and bond markets. We saw some saying France’s Fifth Republic—the entire modern system of governance—could be finished if this happened, leaving a wild, unpredictable, unstable future. That might be far-fetched, but we reckon quieting such chatter should be no bad thing for sentiment—one less wild scare story to preoccupy investors.

One last thing: Whilst the chaos hogs headlines, we see strong indications markets are used to it. They have been living with these flareups for over a year now, ever since Macron called a snap election last year. The MSCI France is up 14.9% since 30 June 2024 and basically flat since the latest crisis began last Monday.^[vi] Yes, it is a smidge behind global stocks, but we think that seems more indicative of sector-related issues and higher uncertainty weighing on returns than deep, valid risk surrounding France’s finances or future as a country.^[vii] As uncertainty continues fading, we think the cloud hanging over French stocks likely will as well.

Is Japan’s Revolving Door Still Turning?

Meanwhile, in Japan, uncertainty appears ticking higher. Last Friday, the Liberal Democratic Party’s (LDP’s) longtime coalition partner, Komeito, left the alliance after the LDP didn’t agree to its terms to draw a firm line under last year’s fundraising scandal.^[viii] Then the main opposition Constitutional Democratic Party for Japan (CDPJ) let slip that it was working with other minority parties to field an alternate candidate and would be open to supporting a PM from outside its ranks.^[ix] Suddenly, the seemingly foregone conclusion that Takaichi would become the next PM wasn’t foregone anymore.

The situation is still in flux, but clarity will likely come soon. Takaichi has been meeting with the Japan Innovation Party, whose size in Parliament makes it something of a kingmaker, and which had already been mulling joining an LDP-led coalition.^[x] She has also been talking with the CDPJ in hopes of securing enough support on policy proposals to get her premiership over the line.^[xi] But it also continues talks with the other parties and, as we write, hasn’t agreed to schedule the PM vote in the legislature yet. For now, all we know is that the special legislative session to take care of all this starts next Tuesday.

Uncertainty is high today, but we don’t think this is a major game-changing moment for Japanese stocks. Whoever becomes PM, political gridlock will probably reign. We have already seen this under the LDP’s minority government. If the opposition fields a winning candidate, he or she will preside over a multi-party coalition, the kind that has pancaked much of continental Europe into gridlock in recent years. Both point to very little legislation passing for the foreseeable future, extending a status quo that Japanese markets have been a-ok with.[xii]