Abe’s departure unlikely to change policy missteps

Although there is no shortage of accolade in the media for the outgoing and longest serving Japan’s PM, Shinzo Abe, it is no secret that we at Asymmetric Advisors have held a dimmer view of his leadership in the past few years. This is especially so during the current pandemic when like many populist leaders, he had utterly failed to proactively tackle the spread of the virus. We were also shocked by Abe’s decision last year to impose export restriction on some key semiconductor materials to South Korea, a move which we believe would only push Korean chip makers to become less reliant on Japan’s technology supply chain. His more recent anti-China stance in sympathy with his friend in the White House also became a cause for concern given that China is Japan’s largest trading partner by far. 

Fortunately, despite government’s inaction in regards to the spread of the virus and Japan’s ageing demographics which would have normally left any nation vulnerable to high infection rates and fatalities, the social norms in Japan seem to have limited the number of casualties to relatively low levels thus far. So, although Mr Abe has resigned from his post reportedly due to ill health, we think his sinking popularity which in our view had become a liability to the LDP had played a key part in his decision to step down. Indeed, in our July 25th publication, ‘More turbulence ahead as Trump and Abe fight for political survival..’, we had once again underlined why we believed Abe-san’s days as leader of the country were numbered. 

Although the stock market in Japan predictably fell on the news as concerns about political turmoil led to some panic selling, it should be noted again that much of the heavy lifting within the Abenomics playbook has been conducted by Japan’s central bank which has been governed by Haruhiko Kuroda since 2013, and whose key policies have been to push down rates close to zero and jolt the nation out of its deflationary mindset by massive injections of liquidity into the country’s capital markets. Kuroda-san’s term will not end until 2023 and we believe his aggressive QE will continue as long as he is around and to underline that we expect BOJ to step in this coming Monday to buy stocks aggressively. 

Abenomics and Krudanomics inextricably linked
To be sure, we also regard Mr Kuroda’s ultra-loose monetary policy as largely a failed experiment which has led to massive drainage of liquidity in the JGB market, crushing of lending margins and investment returns in the financial sector, and through aggressive equity ETF purchases, having created big anomalies within Japan’s stock market, destroying any chance of price discovery and having partly led to a falling trend in foreign share ownership. Although the global pandemic has since led to aggressive QE by all major central banks, in Japan there has been no room left for further monetary easing, leaving the yen on an appreciating trend thus far.

We have long sided with key arguments of some past BOJ governors, namely the central bank’s last chief, Masaaki Shirakawa who had led a major study that convincingly linked Japan’s deflationary or disinflationary trend to its fast ageing population. We have also long admired Yasushi Mieno who had pricked Japan’s asset price bubble of the 80s with vigour, recognising early on during his tenure that despite seemingly low inflation rate at the time, not only fast appreciating asset prices had created much instability within the financial system but it had also created major inequalities that threatened to tear apart Japan’s social fabric and its egalitarian society, a concept that is a hot topic in America today. 

Nevertheless, regardless of our own beliefs, markets view Kuroda’s reign at BOJ as a positive continuum which if disrupted would likely lead to a much stronger yen and potentially a more notable correction in stock prices. For these reasons we think any new leader that LDP picks as the next PM will most likely continue with the Abenomics, and hence Kuronomics doctrine. Although Mr Abe’s exit leaves the door open for new generation of leaders with fresh ideas such as the current environment minister, Shinjiro Koizumi, who has a strong green agenda, the more likely choice would be a dull Abe loyalist from his own faction who will lead the party under the shadow of the outgoing prime minister.