LDP leadership race promises big changes, even at BOJ
Although Japan’s politics has had some colourful and assertive characters in the past three decades like Ryutaro Hashimoto, Ichiro Ozawa and Junichiro Koizumi, we can’t remember a time when a leadership race in the LDP was so personality-driven and consequential. As we highlighted last week, irrespective of who leads, Japan’s foreign policy towards China is likely to turn far more hawkish which over the medium term could disrupt trade.
Tired Abenomics policies are also at stake with candidates like Fumio Kishida calling for a break from neoliberal policies and deregulations that began under Koizumi-san twenty years ago but had been fine-tuned under Shinzo Abe. Kishida-san’s warning about growing wealth disparities in a more egalitarian Japan does resonate with many lawmakers wary of Western style capitalism and its poverty problem, looking to preserve what they view as Japan’s more harmonious society.
However, what is most striking is that almost all candidates support reflationary fiscal policies while BOJ’s ultra-loose monetary policy experiment is increasingly viewed as a failure. Having long argued that Kuroda-san’s ZIRP and aggressive QE has done little to move the inflation gauge while having weakened Japan’s financial institutions by crushing the yield curve, lowering investment returns for pension funds and sucking liquidity from Japan’s capital markets, we are now hopeful that his days as BOJ’s chief is finally drawing to a close.
Kono-san’s nomination should lead the market higher
Japan’s Topix index rocketed passed its March peak last week, now looking poised to test its June 1987 highs of 2200. As we have previously underlined, we have high hopes that our market will rise much further in Q4 given its very attractive valuations and its highly cyclical nature. We think that as long as US long term rates hold up, and growing inflationary pressures suggest they should, Topix is likely to head towards Y2500 by year-end or nearly 20% above its last close.
We view the likely nomination of the popular reformist, Taro Kono as the most positive outcome for the stock market. We think his recent comments that he will allow nuclear power plants to restart for the time being, to meet Japan’s zero emission pledge, should help his chances given the industry’s powerful lobby group that have helped keep Tepco on a costly public money life support while billions of dollars more are needed for decommissioning Japan’s ageing other nukes which the restarts help delay.
With his execution of ramping vaccinations programs in Japan having proven most impressive and now looking to overtake most other G7 nations by October, Kono-san should enjoy the tailwind of having a high initial public approval rating vital for LDP, going into this year’s Lower House elections. Although we see dark clouds forming over the horizon as the geopolitical storm with China gathers more strength, for now we choose to look away and just enjoy Japan’s moment in the sun.