Between the close of August and the publication of this newsletter Japan’s Prime Minister Yoshihide Suga announced that he would not stand in the leadership election for his party – the LDP – at the end of September. The Prime Minister’s claim to prefer to focus upon the country’s ongoing Covid battle rather than to be distracted by intra-party electioneering may seem noble, but is likely a smokescreen for a less palatable political reality: that party kingmakers had lost faith and pulled the plug.
With a general election on the horizon, Suga’s plummeting popularity had made him a liability. Whether the LDP would win the next election was never in question, but the prospect of losing more seats and having to cede more power in coalition appears to be more than party bigwigs could stomach.
A general election must be held by 28th November, as this is forty days after the end of the current diet session, but could be called sooner if the government wants to take advantage of the inevitable bounce in popularity for their new man. It is just possible of course that the next Prime Minister is actually a woman, as reports of support for right-winger Sanae Takaichi – from no other than the former PM Abe no less – have emerged1. It seems more likely, however, that the top job will go to one of the well-known men in or around the Suga cabinet.
So, who will take Suga’s place and, moreover, does it even matter? To begin to answer the first question it should be understood that the next PM will be chosen by dietmen (MPs) and local party members, not by the electorate. Factional voting lines will be important, as will the utterances of high profile non-running politicians including the “3 As” of Abe, Aso and Amari. That said, there are obvious incentives for the party to select a leader they expect to be popular at the ballot box, especially with an election looming.
The two front runners appear to be Taro Kono, Minister of Administrative Reform and Regulatory Reform, who was recently recruited to turbo-charge Japan’s vaccine drive, and Fumio Kishida, a powerful back bencher who had been Foreign Minister (as had Kono). Kishida is head of his own small faction, but Kono is a member of the Aso faction, one of the two major blocs. Kishida’s popularity varies by poll, but Kono is invariably popular with the public. As things stand Kono probably takes it, but anything can happen in politics and his popularity and uncontrollability may do for him yet. Whether the public backing of his current boss, the unpopular Suga, is a help or a hindrance for Kono remains to be seen.
So, what does Suga’s departure mean for the market? The very near-term indications were positive – the market jumped intra-day on the move. 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 therefore if this sector were to benefit from Suga’s political demise.
Suga may have been a political dud as PM, but he was hardly 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 amidst pandemic and Olympic travails.
Either of Kono or Kishida would be seen as pro-market Prime Ministers. Only last week has Kishida, possibly smelling blood, been making speeches expressing his desire to spend tens of trillions of yen on economic stimulus to help Japan shake off its Covid torpor2. The fluent English speaking, US educated Kono would likely be a market darling. With foreigners accounting for 60% of Japanese equity traded value, what they think does matter, and they would love to see Kono as PM. Predicting his policy priorities is not easy but in his ministerial capacity he has spoken clearly about Japan’s need to rid itself of burdensome regulation. Expect companies associated with “digital transformation” – the dragging of archaic Japanese corporates (and government) into the 21st Century – to be in even greater favour than they have been of late.
In truth, for the Japanese market politics is rarely the most important thing – a large, developed, globally connected economy and commercial sector is affected far more by issues, both domestic and international, that occur outside of the Diet building than within it. That is probably also true now. The country’s recovery from Covid, the progression of its ageing populace, Japan’s position in between the US and China and the global struggle to mitigate or adapt to climate change will, along with many other things, be more meaningful to Japan and investors than whoever is the next Prime Minister. That said, an unpopular leader of a struggling party does nobody any good. Far better that Japan is rolling the dice again. A new leader will, for a time at least, be able to wield some significant political power. That is seems likely that they might do so in a market-friendly manner is a bonus.
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