Japan will have a new leader as of next Monday, and his name is Fumio Kishida.
The former foreign minister on Wednesday won a four-way race to the post of leader of the ruling Liberal Democratic Party.
Kishida, 64, will be formally appointed prime minister in a special parliamentary session on Oct. 4. He replaces Yoshihide Suga, who is stepping down after just one year in the role due to abysmal approval ratings reflecting the country's battle to get its Covid-19 outbreak under control.
The leadership race went to a two-person runoff, indicating that none of the four candidates had the overwhelming support necessary to secure a clear first-round majority in a surprisingly open contest. In all, 382 LDP lawmakers and 1.1 million members of the party were eligible to vote.
The fate of Japanese equities likely lies in Kishida's commitment to reform. A Nomura report today looks at what leadership qualities generate the best performance for Japanese stocks -- the top indicator of stock gains is the commitment to structural reform.
Japanese stocks saw their greatest strength during the time in office of reformist leader Junichiro Koizumi. The curly-haired prime minister, in the post from 2001 to 2006, brought fresh air and fresh ideas to Japanese politics, known for their staid nature. He replaced a procession of faceless bureaucrats with style, privatizing the Japan Post service and therefore the country's enormous postal-savings system.
International investors, who have surprisingly strong influence over the Japanese markets, bought into his reformist ideals. As a result, overseas investors were net buyers of Japanese stocks for 23 straight months between June 2004 and April 2006, the longest stretch of net buying since records began in 1973. In the midst of that run, Koizumi won a 2005 reelection in a landslide, one of the biggest majorities ever achieved in Japan.
Surprisingly, Nomura's Japanese valuation indicator shows that equities did not benefit to the same extent during the tenure of Japan's longest-running prime minister, Shinzo Abe. His vaunted policies of "Abenomics" promised to strive for structural reform, but in the end made little progress on that front. Of the three "arrows" of Abenomics, it was the hardest to land, with monetary easing and fiscal stimulus far easier to achieve.
There were strong stock-market gains when Abe first took office at the end of 2012. But Nomura attributes their rise in large part to the depreciation of the Japanese yen as well as large-scale stimulus from the central Bank of Japan.
Kishida, Japan's longest-serving postwar foreign minister, has yet to demonstrate a strong political or personal profile -- a polite way of saying he's a bit bland and boring -- and is known as a consensus builder within the LDP. His leadership will immediately be tested, with a general election necessary by late November.
Kishida is not off to a great start. He beat out vaccine czar Taro Kono in Wednesday's vote. But Kono was more popular with the public, who in polls indicated they supported him to become next prime minster, while Kishida relied on internal party support.
Two women also ran, both former internal-affairs ministers bidding to become Japan's first female leader. Arch conservative Sanae Takaichi won some supporters while Seiko Noda, from the LDP's weaker liberal wing, trailed far behind in fourth.
Kishida is a favorite of the political class. There are several political dynasties in Japan that put the Bush and Kennedy clans to shame for longevity and influence. Members of parliament who belong to such dynasties are more traditional in their mindset, and have been far less likely to champion reform.
Kishida and Noda had strong support from those dynastical powers. Kono and Takaichi were comparative outsiders who would have therefore had fewer vested interests to hold back any efforts to push political change.
"It has been suggested that hereditary politicians obstruct structural reforms that promote new, highly profitable industries as they seek to protect old industries that have special ties with the regions they serve," Nomura macro strategists Yoshitaka Suda and Yunosuke Ikeda explain in the report.
Kishida in fact had backing from seven such dynasties, one more than outgoing Prime Minister Suga, who was Abe's hand-picked successor. Abe favored Takaichi in this runoff since her views mesh best with his nationalist-leaning stance.
No consensus candidate emerged among the four runners. The various factions within the LDP did not identify preferred candidates, leaving their members to vote independently. Kishida won backing from some members of Abe's faction as well as from the faction of Finance Minister Taro Aso, even though Aso's clique includes Kishida's rival Kono. Kishida won the final vote by a decent margin, with 257 votes to Kono's 170.
Japanese stocks sold off hard on Wednesday, mapping the declines on U.S. markets the day before. The broad Topix index as well as the Nikkei 225 benchmark both ended with a 2.1% loss after the S&P 500 fell 2.0%. The Tokyo market got a bounce after Suga said he would step down but has now given back that ground. It's highly likely there will be a small new-leader premium when Kishida takes power.
Suga exits stage right having alienated the Japanese public with a reserved, removed and aloof style of governing. Japan has been slow to roll out Covid vaccines, and the decision to plough ahead with the Tokyo Olympics during the pandemic also won him no favors, despite the events being a resounding success when they occurred. The coronavirus surged during July and August, leading Suga early this month to say he wouldn't run in today's leadership vote.
Kishida ran against Suga, unsuccessfully, when Abe resigned, blaming ill health. Now he will finally place his nameplate on the prime minister's desk. Assuming all goes to plan with Monday's vote, he will immediately appoint ministers and name his cabinet.
Kishida has raised the issue of Taiwan, which he says will be the "next big problem." He has also suggested revising Japan's Self-Defense Forces law, imposed after World War II and restricting the country's military from deploying in a war outside Japan.
Economically, Kishida wants to maintain the easy monetary and fiscal policies of Abenomics. He wants to maintain a 2% inflation target, and says a stimulus budget of several trillions of yen will be necessary. But he wants to focus less on economic growth and more on the "correction of disparity" in wealth, and boosting the middle class. He is an advocate of renewable energy, and favors restarting Japan's nuclear power stations, some of which remain siloed.
Kishida would like to see it made easier to dispatch the Self-Defense Forces overseas for evacuation missions. That's something he would have in common with Koizumi, who sent Japanese troops into a war zone for the first time since World War II when he deployed a battalion-size squad to Iraq in 2004, albeit to aid in reconstruction and humanitarian efforts.
Japan's infection rate peaked at more than 25,000 new Covid cases per day in late August. That figure has now fallen to around 2,000 infections. Kishida may have to prepare for a resurgence when the weather gets cold heading into winter. Kono has won praise for kicking the country's Covid response into gear, with 58% of the Japanese public now fully covered by two doses of a vaccine.
Without much star power, Kishida must quickly make his presence felt on the top stage. Otherwise he will suffer a similar fate to Suga. There were six prime ministers in the six years before Abe took power in December 2012. With Suga lasting a year as well, the revolving door is already in motion as Kishida steps in.