In October, Japan’s ruling Liberal Democratic Party (LDP) chose Sanae Takaichi as its new leader. Following a summary divorce from its coalition partner, the Buddhist Komeito party, and a swift remarriage to another, the right-leaning Ishin no Kai, Takaichi was confirmed as the Prime Minister of Japan, the first woman to hold the office.
Japan is no stranger to changes in its key political personnel – Takaichi marks the fourteenth new PM this century. Most of those changes, from Noda to Kan or Suga to Kishida, were functionally meaningless to investors. Others, such as Shinzo Abe’s second term from late 2012, brought agendas of genuine renewal and change to which investors had to be alive. What, for investors, will the Takaichi era mean…if anything at all?
At the highest level, a resolution of the recent spasm of political instability should be seen by markets as a good thing. Just as Japan’s Ise Shrine is rebuilt every twenty years to ensure its continuity, so too does the LDP embrace destruction – of a Prime Ministerial career – to ensure its continuity as the party of Government. With a new and better-suited coalition partner, the Japanese government once again is firmly in control which should appeal to international investors fretful of political risks in other big markets.
A protégé of Abe and a self-declared admirer of Margaret Thatcher, Prime Minister Takaichi has promised to “push Japan to the top again.” Her nationalism, including opposition to Japan’s pacifist constitution, plays well domestically but risks straining relations with China and other neighbours. Her objection to Japan’s pacifist constitution means that her elevation could add further fuel to the already hot Japanese defence sector.
However, the similarities between Takaichi and Thatcher do not run deep. Rather than being a reformer with sound monetary policy at her heart, Takaichi is a fiscal and monetary dove. In the past, she has advocated slashing consumption tax and last year she said that the Bank of Japan would be “stupid” to raise interest rates.1 When discussing how to combat the effects of inflation on households, Takaichi called on the use of excess tax revenues and said that more government bond issuance is “unavoidable”.2 If as purposeful in power as she was provocative out of it, this could have profound implications for the banking sector and consumer-focused businesses.
This school of economics, though, does not make perfect sense to us. It could worry the financial markets, too. A Takaichi Prime Ministership could be inflationary rather than deflationary, with higher government bond yields in anticipation of further issuance. Meanwhile, most would expect the Yen to weaken if Takaichi’s dovish fiscal stance was to prevail, boosting exporters’ profits perhaps but doing nothing for family food budgets already squeezed by imported inflation (below). Maggie would not approve.
The bull case for Takaichi premiership, though, rests upon her Abe-ite bona fides. If she can continue to push the corporate reform agenda, she will be a huge success and so will Japan. If Abe’s legacy has been the belated awakening of Japanese management to the necessity of better corporate governance and a promotion of shareholder rights, then Takaichi’s should be the fundamental restructuring of Japan’s corporate sector – a big theme in our portfolios. With too-low profits and too many conglomerates, Japan’s companies need to be shaken up. Who better to do that than an Iron Lady?
The value of active minds: independent thinking
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