Friday, January 21

What Japan’s New Middle Leader Means for Markets

After a surprisingly competitive month-long race for Japan’s new leader, the race predictably ended: Fumio Kishida, the most experienced and most intermediate candidate, will become Japan’s 100th prime minister.

For better or for worse, investors see Kishida as a continuity option: stable, but unlikely to boost markets much. Early in the race, foreign investors and retailers were intrigued by the potential of a Taro Kono victory, drawn by his fluent English, reformist leanings, and knowledge of social media.

“Kishida is likely to drive the weakest moves in the stock market,” wrote Goldman Sachs Group Inc. economist Naohiko Baba in a report, “especially since his reformist views seem somewhat weak and his stance on fiscal discipline is cautious. “.

The stock market reaction to Kishida’s win was subdued in early trading Thursday, with the Topix index little changed at 9:20 am local time.

Delivering a new stimulus package that doesn’t disappoint investors will be Kishida’s next challenge. He vowed to be nimble on spending as the economy recovers from the pandemic, and after Wednesday’s victory, he repeated his promise to compile a package worth “tens of trillions” of yen before the end of the year.

Kishida’s support for removing virus restrictions and restarting the popular “Go To Travel” discount program may have equity investors take another look at rail and airline operators, just as the country’s latest state of emergency is in. scheduled to end this week.

Stable, boring

In the long term, Kishida will need to indicate when Japan should refocus on balancing the budget. Kishida has sounded aggressive on government debt in the past, even raising the idea that another sales tax increase would eventually be needed to generate revenue, although he said it would not be in this decade.

While investors may not be overly excited about a continuity administration, in an election year, stability could be a good thing. Japan’s shares lagged in other markets for much of this year amid concerns that the unpopularity of outgoing Prime Minister Yoshihide Suga could cause the PLD to lose seats in general elections this fall.

Kishida’s leadership should guarantee a solid victory, said John Vail, chief global strategist at Nikko Asset Management Co.

“This should lead to hope for the cabinet’s longevity, which consumers, businesses and investors should view positively,” Vail wrote in a note Wednesday.

‘New capitalism’

Kishida, however, is not Abenomics 2.0. He said Japan needs to narrow the wealth gap that widened under former Prime Minister Shinzo Abe’s market-friendly policies, where wage gains lagged behind rising asset prices.

He has floated the idea of ​​a “new kind of Japanese capitalism”, which favors redistribution and wage increases, but has been vague on the details of how he will achieve this.

Still, economists don’t see Kishida pressuring the Bank of Japan to change course anytime soon as he has voiced support for the bank’s aggressive easing and its 2% inflation target.

A key decision facing Kishida is whether to replace Finance Minister Taro Aso, who held the powerful position in the nearly nine years of the Abe and Suga administrations. Kishida said Wednesday that he wanted his cabinet to be younger than Suga’s, while Aso turned 81 earlier this month.

If he lasts longer than Suga, an equally important decision looms, as Haruhiko Kuroda’s term as BOJ governor will expire in early 2023.

© 2021 Bloomberg

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