Japan stocks come alive as Suga resigns but future China relationship to worsen

As Japan’s PM resigns, Japan’s stock market is coming alive
As we have long anticipated, Mr Suga has finally stepped down, leaving the door open to potentially some exciting changes at the top that could have a big impact on the market in the medium term. Although we were initially shocked that LDP’s faction leaders were said to be still behind Suga-san despite his plunging poll standings, his resignation ticks one of our boxes for our 2021 market events. 

More importantly, as we have been hoping for, his standing down has been seen as largely positive given his lacklustre performance in office. This brings us to our short-term playbook which had called for the market to test its March highs by the end of this quarter and break out to set the stage for a big Q4. With global cyclicals showing strong signs of rebounding, Japan’s highly economic sensitive stock market is finally playing catch up having peaked around the same time as US long bond yields back in March.

We are hoping that LDP party leaders will yield to the will of the nation and allow for the highly popular and straight-talking Taro Kono, who was heading Suga’s reform policies to take charge. Having performed very impressively by taking over Japan’s vaccination programs, he is likely to chart his own path that could spell the end for Abenomics. In a sense he really is the only one that could save the party from its sliding public support, not too unlike when Koizumi-san saved the party in 2001. 

Japan/China relationship to worsen while ARM’s IPs get raided 
Even before Suga’s resignation, the fate of party’s powerful Secretary General, Toshihiro Nikai was sealed as calls for him to be replaced provided a glimpse of Japan’s back-room politics and the behind-the-scenes power play. With his pro-Olympics policies having proven disastrous and his pro-China views now regarded as outdated, the departure of Nikai could put Japan on a more hawkish path of dealing with China which we think could entail more comprehensive export restrictions, especially in the technology segment. 

In fact, there is more cause for concerns in that space on what looks to be a huge intellectual property theft from the UK-based ARM by its partially owned Chinese unit. The firm, calling itself Amou Tech, claims it has inherited ARM’s existing IPs and will be operating totally independently from its previous UK parent. Given the importance of ARM’s chip architecture this looks like a state sponsored raid or at least having the blessing of the Chinese government.

With geopolitical tensions with China at already very elevated levels, we are surprised this has gone largely unnoticed, especially as British politicians are currently weighing Nvidia’s planned acquisition of ARM. We suspect this is partly to do with the cash-strapped Softbank Group which owns ARM and wants to keep this potential disaster fairly quiet and hope that NVDA’s $40bn bid for the UK firm is approved quickly.