Japan’s younger lawmakers breaking ranks to vote for change
We remain excited about the prospects of our own stock market in Japan as a generational battle is brewing within the ruling LDP party whose leadership race should prove consequential. We haven’t seen this much political activity and faction realignments since LDP’s once powerful kingmaker, Ichiro Ozawa left the party in 1993 to eventually form an opposition alliance that briefly toppled the group from its uninterrupted post-war reign.
With LDP’s young Turks breaking ranks from their own factions to vote for who they prefer ahead of the fast-approaching lower house elections, there is a sense of change coming that could not only break Japan away from a decade of Abenomics policies, but it could redefine its geopolitically standing as tensions with China mount. With the popular Kono-san, backed mainly by the younger law makers still looking like the best possible outcome for the market, we keep a close eye on events leading up to LDP’s leadership race on 29th Sep.
External environment could dampen market sentiment
With quarterly US earnings results around the corner, concerns about peaking profit margins from rising input costs and generally weakening demand picture is raising investors’ anxieties once again. As we have argued, in the past few months, we see inflationary pressures only strengthening for the rest of the year from disruptions caused from spreading Covid delta variant and series of climate-related natural disasters that have further rocked global supply chains.
We believe these factors have led to a notable deterioration in corporate earnings visibility that could be setting the stage for some negative earnings surprises globally, at least until the end of the year. With US stock market looking over-stretched, there are growing concerns for a big correction going into the coming earnings season. Needless to add, because these issues could also weigh on sentiment in our own market and could spoil our outlook for the Japan rally to continue next quarter, we will be watching the coming US earnings season and its read-across very carefully.
Moreover, as we have also argued, we think shortages of semiconductors and other key components this year must have led to some hoarding and double ordering that should have notably distorted the picture for the current supply/demand. With inventory supply chains in a state of flux, it is extremely difficult to gauge the potential oversupply from any slack in end-demand but it could be notable. Moreover, talks of capex and related orders showing some signs of slowing in China is also starting to emerge among Japanese supplier of high-end technology equipment which also keep us vigilant for short ideas.