Former foreign minister Fumio Kishida was appointed Japanese prime minister as expected on Monday. In his first few days, he is demonstrating an early willingness to give Japan a muscular international presence while promising to revitalize the pandemic-hit economy with stimulus spending.
Kishida unexpectedly called a parliamentary election for October 31, earlier than mandated, as an early test of his popularity, which is not strong. And he indicates a willingness for Japan to act overseas, saying acquiring the ability to strike enemy bases is a viable option. That's highly controversial in Japan.
His foreign minister, Toshimitsu Motegi, says of Taiwan that Japan must weigh "various possible scenarios that may arise," instead of simply monitoring the situation. The suggestion of direct involvement is a break with the past. Analysts say the language is intended to highlight that Japan is watching the role of China, which over its October 1 National Day weekend launched a record number of nuisance flights into Taiwan's air-defense zone.
One of the new Japanese leader's first orders of business was to field a 20-minute congratulatory call from U.S. President Joe Biden. The two leaders affirmed the importance of the U.S.-Japan Alliance in maintaining peace and security in the Indo-Pacific. Biden said he hopes to strengthen the relationship in the years ahead, including through the Quad alliance of the United States, Japan, Australia and India.
The chief regional security challenges they face are North Korea and China, which the two leaders say they will tackle together. Kishida told reporters that Biden reassured him about the U.S. commitment to defend Japan and its territory, including the contested Senkaku islands, which China insists belong to it, calling them the Diaoyu islands. Japan has effective control of the uninhabited islands as part of the city of Ishigaki, on another island immediately to the south.
The most-significant action for investors so far has been Kishida's pledge to create an endowment that will fund university education. The plan is to start the endowment with ¥4.5 trillion (US$40 billion), ensure it can generate investment gains of ¥300 billion (US$2.7 billion) within five years, and build it out to ¥10 trillion (US$90 billion) within the next 10 years.
The fund will target an annual return of at least 4.38%, with an intrinsic gain of 3% and 1.38% to offset inflation. It will have a 65%-35% stocks-to-bonds split.
Assuming an allocation of between 25.7% and 32.9% to domestic stocks, the same breakdown used by the huge Government Pension Investment Fund, the university fund should create near-term buying in the order of ¥1.16 trillion to ¥1.48 trillion, Nomura calculates.
Using the impact of a GPIF portfolio revision in 2014 as a guide, Nomura calculates that the university-endowment buying will boost the Japanese stock market, in the form of the Topix index, by between 4.6% and 5.9%. That's based on precedent. The GPIF revision caused a smaller reweighting, and provoked buying by trust banks that boosted the value of the Topix by 2.9%.
Around 50% of the equity allocation will be to overseas stocks, and the bulk of the 35% bond allocation will also be to overseas debt, Nomura predicts. This will cause yen selling by the university-endowment fund, to fund the purchases. This could cause the yen to weaken by ¥1, perhaps more if speculators pile on as they anticipate that effect.
I was looking for a debutant bounce for the Japanese markets as Kishida takes power this week, but there's been no such thing. The Topix, which tracks all companies in the First Section of the Tokyo Stock Exchange, has moved 2.2% lower this week, largely influenced by the direction of U.S. markets.
Japanese stocks have lost 8.4% in the last three weeks, taking them back to the levels of early summer. Thanks to ground gained at the start of the year, Japan is still posting an 18.0% advance in the last year, a solid showing that's in the middle of the pack among Asian markets.
Chinese and Hong Kong stocks have been clear underperformers, weighed down by credit concerns over the property industry and China Evergrande (HK:3333) (EGRNF) .
After six slow months, Japanese stocks have actually been catching up ground recently, with an 11% outperformance over the S&P 500 since August 20. Japan's vaccination program got off to a glacial start, but has now covered 62% of the population with both doses. That figure was in single digits as recently as May.
A huge surge in infections swept the nation in July, August and September, with as many as 24,000 new cases reported in a day, triple the previous high. That has now abated. But the disease and its scars are not gone.
"Japan's national crisis will continue," Kishida said in his first brief comments in office, promising to fight COVID with the "utmost determination" and to roll out economic stimulus "on the scale of tens of trillions of yen" by the end of the year.
With earnings growth of 32.2% anticipated for the current year, Japanese stocks are not expensive, at 15.4 times future earnings. The 2021 earnings look great considering how savage the pandemic-produced downturn was in 2020.
The year-to-date returns in Japan are driven by staid, traditional industries, with shipping companies, insurance, instrument makers, iron & steel suppliers, air transportation and banks leading the way. The showing has been far more muted in "exciting" sectors like electronics, biotech and telecoms.
There aren't a lot of expectations on Kishida. The approval rating of his cabinet, stacked with members of the factions of former prime minister Shinzo Abe and former finance minister Taro Aso, has only 49% support, according to a survey by the Mainichi newspaper, far lower than the 64% support enjoyed by outgoing prime minister Yoshihide Suga when he took power.
Kishida won office on the backing of support from within the ruling Liberal Democratic Party rather than the general public. A moderate, he shifted to the right by taking a conservative stance on issues such as same-sex marriage. That's not popular with the public but satisfies the party's elite.
One area to watch is Kishida's concept of "new capitalism," which promises to refine the Abenomics economic package to focus on a "virtuous cycle" of growth and wealth redistribution, favoring the middle class. It's not clear entirely what that means. But Kishida wants to stimulate consumption and corporate investment while easing the financial burden for families with support for education and housing, especially for families with small children. Taxes may rise on capital gains and dividends, with other policies put in place to benefit small- and mid-size businesses.