It can't do a world leader's confidence a lot of good when he or she steps down and markets go up. But that's exactly what has happened in Japan.
The hand-picked successor to Japan's longest-serving prime minister, Shinzo Abe, has lasted less than a year. Yoshihide Suga, a lifelong bureaucrat, lacks charisma and failed to connect with the Japanese public.
Suga's popularity had plummeted to abysmal depths, mainly due to Japan's botched handling of the pandemic and vaccine rollout. The public opposition to the Tokyo Olympics didn't help, even though much of that melted away once the Games began.
Suga said last Friday that he won't run for re-election when his governing Liberal Democratic Party holds its leadership election Sept. 29. The Japanese stock market, in the form of the broad Topix index, has risen 4.7% since his decision, investors betting that the next leader will spread a little largesse when he or she steps in.
Japan has been exceptionally slow at rolling out vaccines, partly because it insists on using only clinical-trials data generated within Japan to approve new drugs. The government was also uncertain how to proceed, with the top leadership noticeable by their absence.
That left the Japanese public unprepared to face a massive surge in infections across July and August. After bringing two ripples under control, Japan saw a wave crest that at its peak was adding almost 25,000 COVID cases per day. Any vaccine skepticism, a common trait across Asia, vanished.
Back in May, less than 1% of Japanese people were fully vaccinated. Even as of the start of July, only 15% of people were. As infections surged, suddenly everyone wanted the shot. Japan has made better recent headway, with 59% of the population with one shot and 48% fully vaccinated.
It is Japan's "vaccine tsar" Taro Kono, generally credited with getting the government's act together, who appears to be the front runner to replace Suga. A former minister of both foreign affairs and then defense under Abe, Kono had the most support in a JNN poll of party supporters on Sept. 4 and 5, although his 25% support gave him a narrow lead ahead of a crowded field.
Only the man Kono replaced as defense minister, Fumio Kishida, has officially stated he will run in the election on Sept. 29. But Kono will announce his decision to run by the end of this week, according to local media. Two former internal-affairs ministers, Sanae Takaichi and her successor Seiko Noda, are also in the mix and would be the first female prime ministers in Japan were they to win. Former defense minister Shigeru Ishiba opted not to run and voiced support for Kono instead. Environment Minister Shinjiro Koizumi, the second son of reformist prime minister Junichiro Koizumi, is at the age of 40 a rising political star but a long shot this time around.
Takaichi has made some of the clearest economic statements. She stresses that Abenomics has not fulfilled its pledge to bring inflation to 2%, and she pledges to make that happen. The other candidates seem to think Abenomics is still working, though critics note that Suga, after promising to continue those policies, quietly stopped paying them much attention. Kishida says he won't start the process of normalization of fiscal and monetary policy, meaning he would keep the easy money era working. Kono has said almost nothing about Japanese economics in the past.
The final lineup must be settled by Sept. 17. Whoever becomes leader, the ruling party will likely win an election for the Lower House of Japan's Diet that must take place on or before Nov. 28. There's also an Upper House election due next year.
How stocks may react
Japanese share prices should get a boost if the leader is seen as offering a continuation of the current easy monetary and fiscal policy (let's not forget Suga got his own boost). If it's a hotly contested party vote and a strong leader emerges, that may generate greater public interest in the parliamentary elections, which likely also would boost markets. The Japanese yen will likely weaken to reflect increased government spending.
Japanese shares have been surprisingly strong both recently and in the last year. The move up as the prime minister steps down brings the gains since Aug. 20 to 10.3%. They've risen by more than 31% since the start of November, which doesn't even factor in the pandemic-induced leap of 25% from the lows of March 2020. Throw that in and we're talking an advance of 64.5% since the COVID low on March 13 of last year.
The Nikkei 225 index in the last couple of days has crested above 30,000 for the first time since April and it is approaching its February highs. Those are levels last seen in 1990, when Japan's go-go 1980s bubble was bursting.
Nevertheless, market watchers say the Nikkei's price-to-earnings (P/E) ratio of 17.3 remains attractive compared with other developed markets. The broader Topix, which tracks all the companies on the First Section of the Tokyo Stock Exchange, has an even-lower P/E of 16.8 because many midsize and small companies trade at discounts to the 225 major companies in the Nikkei.
The Dow Jones Industrial Average is trading at a P/E of 23.9 for its more traditional holdings. The S&P 500 stands at a P/E of 31.3 and the Nasdaq 100's tech-oriented holdings trade at a P/E of 36.1.
Abe era a rarity
Will Suga's departure usher in another era of political revolving doors? It's highly likely. Prior to Abe's second time in office, it was uncommon for any leader to last more than nine to 12 months in office. There were six prime ministers in the six years before Abe took power in December 2012. None of the current potential successors exactly scream star power, with Koizumi the exception. But he's also half the age of a lot of recent Japanese PMs. Japan doesn't elect youth.
The party in power, the Liberal Democratic Party, essentially has had a lock on the leadership of Japan since World War II. The winner of the Sept. 29 internal election is basically certain to become the next prime minister. Suga has his own small clique as one of the nine powerful factions within the LDP, but clearly thought he lacked the pulling power to win what would have amounted to a vote of no confidence.
Abe stepped down on Sept. 16, 2020, citing ill health, although the health of his popularity ratings was also in a dire condition. The stress of leading the world's third-largest economy through the early phase of the COVID-19 pandemic and its worst downturn in modern history cannot have helped.
Abe, who had a year left on his term, was not even able to preside over the Olympic Games that Tokyo won less than a year after he came to power in December 2012. He was a staunch champion of the bid, but Japanese politicians steered clear of the events to avoid detracting from the sport.
He left with his platform of Abenomics revival policies only partially in place. Abe stepped down amid a raft of scandals among his ministers, but blamed a recurrence of the ulcerative colitis bowel disease that has bothered him since he was 15.
Suga as Chief Cabinet Secretary was the official face of the administration, the government's press secretary and spokesperson for all Japan's ministries. So he promised continuity and to keep pushing Abenomics, but largely failed to deliver.
Suga made no effort to reform Japanese banks and large companies, which are plagued by multiple cross-holdings that keep inefficient companies floundering along without pressure from lenders. Japanese companies have made little progress in adding women or independent directors to their boards.
There's normally a new-leader bump when any prime minister takes office in Japan. The Topix has risen 5.3% on average over the six times that the LDP won an outright majority in parliamentary elections. If it fails to get a majority and must form a coalition, which has happened four times, the Topix gain has averaged a gain of only 0.9%, Nomura notes.
The government might embark on another cash giveaway after throwing ¥100,000 (US$907) in the direction of every citizen in the spring of 2020. Such an eye-catching crowd pleaser would boost consumer-oriented stocks. The beleaguered travel and restaurant industries in particular may see support. Reopening stocks would advance. Leading the way at the moment are tech and growth stocks, which depend on exports and global demand.
