The Silliest Season

Story Highlights:

• Japanese Prime Minister Yasuo Fukuda announced his resignation on Monday.
• Any successors' policies probably won't be a huge departure from Fukuda's platform.
• Leadership change in the world's second-largest economy is important, but we don't anticipate widespread negative consequences, as parliament should remain deadlocked.

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On the media's political calendar, August and September are called the "silly season"—the time governments are on recess and not much happens. But someone forgot to tell Japan, as Yasuo Fukuda announced his resignation Monday evening, treating us to the spectacle of a Japanese prime minister stepping down for the second time in less than a year.

Political turnover in Japan shouldn't surprise—Fukuda was Japan's 11th prime minister since 1990. And predictably, this news didn't make big US headlines. US citizens tend to be very US-focused. But global investors must take note of big changes in the political scene, particularly in an economy as large and globalized as Japan's.

The Liberal Democratic Party (LDP) has been in power since 1955, save a brief interlude from 1993 – 1996. But their influence has waned, with the opposition Democratic Party of Japan (DPJ) taking control of parliament's upper house in 2007. In the lower house, the LDP remains in control, but their ranks are fractured. They were largely split over support for Junichiro Koizumi's numerous reforms, and the infighting has hurt most attempts at a cohesive policy agenda since his 2006 departure. The result was a deadlocked parliament that struggled to name a central bank governor, renew anti-terror missions, and pass a fiscal stimulus package. Factor in the numerous scandals of the last year (including rumors of corruption in the defense ministry and the government's loss of millions of pensioners' records), and it's understandable that Fukuda's approval rating was below 30%.

Fukuda claimed he resigned for two reasons: to avoid falling into a "political vacuum" and to allow his successor time to prepare for the next election, which must be called before September 2009. Some folks believe an election will be called sooner to capitalize on the temporary poll bounce a new prime minister may bring. But as the Brits taught us last year, rumored snap elections are never certain, and Japan's parliament may be in for another year of uncertainty and deadlock. Or longer—even if the LDP keeps the lower house at the next election, they probably won't have the two-thirds majority necessary to override the upper house, which doesn't face elections for five more years.

But maybe that's not so bad. While Koizumi's reforms were generally positive for Japan's economy, legislative naptime is generally good for stocks. The likely successor, Taro Aso, is expected to maintain Fukuda's policy agenda. We doubt there will be much effect on the Japanese market or global stocks. Don't get us wrong—political uncertainty in the world's second-largest single country economy is a big deal. But for now, we just see more silliness, this season and beyond.