Suga Takes the Reins

Editors’ Note: MarketMinder is politically agnostic, and we favor no politician or party in any country. We assess political developments solely for their potential economic and market impact.

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 their influence on the country’s economy and stocks.

Most of the commentary on Suga centers on his somewhat unusual background for a high-ranking politician. 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. Of course, stocks don’t care whether a country’s leader has a sweet tooth or a strong core—policy is what matters, and on that front, Suga likely continues 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, it seems unlikely the government will suddenly begin lobbying the Bank of Japan to let up on quantitative easing bond purchases. Fiscal policy probably won’t change much, either. Suga has mooted a third consumption tax hike, but for now the chief priority appears to be shepherding an economic recovery while managing COVID-19, which a tax hike would likely not help much.

As for economic reforms, it would surprise us if Suga managed to accomplish any of the contentious policies Abe failed to push through during his seven and a half years at the helm. While Suga may continue Abe’s effort to amend Article 9 of Japan’s constitution, which renounces warfare as a sovereign right, his background makes us doubt he does so with anything near Abe’s vigor. 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. Pursuit of a constitutional amendment ultimately eroded Abe’s political capital, 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. 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 quite popular with the LDP grassroots.

That looming party leadership vote is one source of political uncertainty, as it may restart Japan’s infamous revolving door of prime ministers. Another source is the fact that 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 he is also enjoying a newfound popularity surge thanks to the aforementioned pancake obsession and other endearing traits, and most Japanese political observers suspect he will try to consolidate that popularity by calling a snap election next month. Ordinarily that would be a very safe assumption, but a COVID resurgence could complicate that. As ever, investors will have to wait and see.

Election chatter and its associated uncertainty could weigh on sentiment for a spell, but policy-wise we doubt it changes much. The LDP’s main opposition remains in disarray, making it highly unlikely that an election later this year would bring a changing of the guard. So ultimately, we expect uncertainty to fall and Japanese stocks’ general comfort with the status quo to continue. That doesn’t mean we are thunderously bullish on Japan, whose long-running structural headwinds we have discussed many times. Domestic demand won’t suddenly jump. But political risk should remain low, benefiting the largest, most globally connected Japanese companies.