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Why it’s not the end of Abenomics: Managers react to Suga’s step back from leadership

Markets are “sniffing lots and lots of money” following the departure of “political dud” Japanese Prime Minister Yoshihide Suga, who announced at the beginning of this month he will not seek re-election as leader of the country’s ruling Liberal Democratic Party.

On Friday 3 September, Suga revealed at an executive meeting that he would step down as leader of the LDP, less than one month ahead of the party’s leadership election and less than three months before Japan’s general election.

The incumbent premier took to the helm after Shinzo Abe – who is the longest-serving Prime Minister in Japan’s history and founded Abenomics – resigned due to ill health at the end of August 2020.

Covid-19 slowing economic recovery in Japan, but catch-up is underway

Over his year-long tenure, however, his popularity waned following low vaccination rates relative to other developed market countries, and the decision to remain the host of the 2020 Olympics despite surging coronavirus cases.

July was a markedly hard month for the premier, with a Nikkei/TV Tokyo poll finding Suga’s cabinet tumbled in popularity to 34% – reaching a nine-year low in relation to other political leaders’ popularity in the country – before falling further to 28% by mid-August.

Stepping down

The secretary general of Suga’s LDP party told global news agency AFP earlier this month: “Today at the executive meeting, Suga said he wants to focus his efforts on anti-coronavirus measures and will not run in the leadership election.”

Markets reacted positively to the news, with the Topix index hitting a 30-year intraday high, while the Nikkei 225 ticked upwards by more than 2% by close-of-play on 3 September.

“The very near-term indications are positive,” Dan Carter, co-manager of the Jupiter Japan Income fund, said.

“This is likely a response to generally lower political risk – a new PM will be more popular, win an election more easily and be able to govern more decisively than the lame duck incumbent – rather than a considered market assessment of the likely impact of Suga’s replacement.

“The sector which has long been seen as the most (negatively) Suga exposed is telecoms, against which the PM battled to cut tariffs. It would surprise nobody – and would please us – if this sector were to benefit from Suga’s political demise.”

That being said, senior investment and markets analyst at Hargreaves Lansdown Susannah Streeter said the Nikkei’s positive gains may have been held back, given Suga was considered to be pro-business and had “spearheaded a drive to promote a more digital focused economy”, as well as push firms to become “leaner and more efficient to solve Japan’s sluggish productivity problem”.  

Leadership bid

It is also a known fact that markets hate uncertainty. The LPD now has only weeks to find a new leader before the general election. Frontrunners currently include Fumio Kishida, who was Abe’s longest-serving foreign minister during his second period as leader; ultra-nationalist Sanae Takaichi who was recently endorsed by fellow conservative Abe; and Taro Kono, who spearheaded Suga’s arguably sluggish vaccine roll-out last year but remains popular among Japanese citizens.

Matthew Cady, investment strategist at Brooks Macdonald, warned Suga’s departure could signal “a potential return to the ‘revolving door’ style of Japanese politics, which preceded former PM Abe’s second term”.

“Between 2006 and 2012, Japan saw six different leaders in as many years,” he said. “This matters for investors as a potential lack of political stability could raise risk premiums for Japanese equities.”

Nick Wood, head of fund research at Quilter, agreed the question remains as to whether Japan moves back to a period of unsettled politics and rotating premiership.

“The ruling LDP faces a general election at the end of November, although at this stage it seems unlikely that other parties will be able to mount a sufficient challenge to whoever takes over from Suga,” he explained. “While a new premier might bring the prospect of greater stimulus, it is unlikely that his successor will stray too far from current policies in other regards, and will remain pro-growth. 

“As such, despite the potential for some political volatility in the short-term, we should not expect to see the end of Abenomics anytime soon and therefore investors can be confident that Japan will continue with its loose economic and fiscal policy.”

‘Sniff a new hit’

Jim Wood-Smith, CIO private clients & head of research at Hawksmoor Investment Management, said a new Prime Minister in Japan is “always expected to bring more money to the party”.

“Japan, of course, has been throwing yen at its economy since most of us were in short trousers and learning our times tables. But, as we have argued for a very long time now, financial markets are hooked on money and react well every time they sniff a new hit,”
he reasoned.

“It would be an over-egging of the pudding of historic proportions to suggest that Japan stands on the cusp of a new era of stimulus and growth. Japan is Japan… the economy will grow slowly, inflation will be next to zero and the fates of its largest companies will be largely driven by the yen.”

That being said, he added it will “also be a hotbed for electronic innovation”, and that it is a stock market with “improving corporate governance, balance sheets and dividend
pay outs”.

“Markets are sniffing money. Lots and lots of money,” he explained, although he also believes Suga’s tenure is “likely to change very little”.

Carter added that Suga “may have been a political dud as PM, but he was not a policy disaster”.

“Indeed, many of his ideas such as the establishment of a digital agency and the mandate for genuine structural reform were well founded, even if they failed to gain traction amid pandemic and Olympic travails,” he reasoned.

Stability

Archibald Ciganer, portfolio manager of the T. Rowe Price Japanese Equity fund, said the most important factor is that the LDP remains in a strong position to remain the ruling party over Japan after the next election.

“Japan is cheap and as it catches up with vaccinations, which it is, we believe the market will re-rate,” he said.

“From a portfolio perspective, we are very excited by the digital opportunity in Japan. Japan leads globally in manufacturing excellence, but woefully lags in digital technology – the Japanese Government has realised this and wants to catch up.

“We have identified and invested in a number of companies benefiting from this significant opportunity.”

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