Japan’s prime minister to step down: why are markets rallying?

Following Yoshihide Suga’s resignation, share prices jumped sharply on Japanese indices. 

Japan’s prime minister Yoshihide Suga announced on Friday that he will step down from power amid flagging popularity.

Suga, pictured, said that he would not seek re-election as the leader of the Liberal Democratic Party (LDP). The LDP has dominated Japanese politics for most of the post-Second World War era, being almost continuously in power. The leader of the party, therefore, is almost guaranteed to become prime minister of the country.

Suga’s resignation comes only one year after he took power. Last August, longstanding prime minister Shinzo Abe announced his resignation for health reasons. At the time, Abe’s resignation initially saw losses among Japanese indices. However, those losses were soon recovered as it became apparent that Suga would succeed Abe. Markets assumed that Suga would continue to carry out Abe’s flagship economic policies, aimed at reversing Japan’s longstanding economic malaise.

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However, with the recent announcement that Suga would be leaving office after just one year, markets have rallied. Over the past five days, the Nikkei 225 has gained just over 7%, as of 6 September. Meanwhile, the TOPIX Index is up around 5% over the same period, and now sits at its highest level since 1991. The Jpx-Nikkei Index 400 is also up over 5.5%.

Why did markets sour on Suga?

Dan Carter, co-manager of the Jupiter Japan Income fund, sees the resignation of Suga as the removal of political risk. Due to his handling of Covid-19, Suga became increasingly unpopular with the Japanese public. A particular sticking point was the slow rolling out of the vaccine programme.

As noted, the LDP has dominated Japanese politics for decades. While it was likely the LDP would win the upcoming November elections, the increasing unpopularity of Suga, due to his handling of Covid, risked the LDP suffering a worse result.

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That could have resulted in the LDP having less seats in Japan’s parliament and therefore less authority to govern. The hope, says Carter, is that “a new prime minister will be more popular, win an election more easily and be able to govern more decisively than the lame duck incumbent”.

Who will be the next prime minister?

As noted, Suga said he will not be seeking re-election as leader of the ruling LDP. So the question of who will become prime minister will not be decided by the electorate, but instead by local LDP members. The winner of this party election will become prime minister, leading the LDP into November’s elections.

Currently, there are two frontrunners in the race: Taro Kono and Frumio Kishida. According to Carter, both will likely be seen as “pro-market”. Kishida, for example, has made several speeches expressing his desire to spend tens of trillions of yen on fiscal stimulus to revive Japan’s economy post-pandemic.

Kono, however, is also likely to prove popular with investors. Notably, Kono speaks fluent English, have been educated in the US. Carter notes: “With foreigners accounting for 60% of Japanese equity traded value, what they think matters, and they would love to see Kono as PM. Predicting his policy priorities is not easy, but in his ministerial capacity he has spoken clearly about Japan’s need to rid itself of burdensome regulation.”

However, the general consensus seems to be that Suga’s successor will pursue relatively similar polices. Nick Wood, head of fund research at Quilter, notes: “While a new premier might bring the prospect of greater stimulus, it is unlikely that his successor will stray too far from current policies in other regards, and will remain pro-growth.”

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Similarly, Chern Kwok-Yeh, manager of the Aberdeen Japan Investment Trust (LSE:AJIT), notes: “We do not foresee any significant changes in policy, except in possible additional stimulus measures that Kishida has mooted.”

More than politics

However, beyond politics, it should be remembered that Japanese equities are primarily driven by the global economic backdrop. As Archibald Ciganer, portfolio manager of the T. Rowe Price Japanese Equity fund, observes: “Over the medium term, Japan is one of, if not the most, open and cyclical market. It is closely aligned to the global economy, and as the economy recovers post-pandemic, Japan’s corporates will benefit from this recovery more than other regions and markets.”

Carter makes a similar point: “For the Japanese market, politics is rarely the most important thing – a large, developed, globally connected economy and commercial sector is affected far more by issues, both domestic and international, that occur outside of the Diet [parliament] building than within it. That is probably also true now.”