Why Are Japanese Stocks Higher After Shock Snap Election Results?
Japanese equities have been buoyed by election results that see the ruling party in disarray. What gives?
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There’s been general anxiety among investors in Asia, given the so far futile efforts to jump-start China’s economy, but the bulls have been buying in post-election Japan.
The ruling Liberal Democratic Party (LDP) had a chastening showing, losing its majority in the Lower House of parliament for the first time in 15 years. All the signs are that the party will find it difficult to push through policies. So the buying is largely on the back of a likely weaker yen, with the central Bank of Japan (BOJ) finding it hard to raise interest rates during this period of political turmoil.
There have been some questions in the comments about where the Japanese yen and Japanese markets may head. The yen did strengthen from ¥161 to the U.S. dollar in July to ¥140 by late September. But the political uncertainty has set it back on a weakening course.
That’s generally good for the profits and stocks of the major exporters that dominate “Japan Inc.” In my quarter century in Asia, my mental math revolves around a yen that’s “around ¥100” to the U.S. dollar, so its current rate at ¥153 is shocking.
The broad-market Topix stock gauge is up 3.3% since the election, while the blue-chip-dominant Nikkei 225 is ahead slightly more, as you’d expect, up 3.6%.
The yen, meanwhile, has progressively weakened over the last month. It was jolted by the selection of newly installed Japanese Prime Minister Shigeru Ishiba in late September, and jolted again by the election results. It seems this period of extended yen weakness will be sustained.
The United States could learn from Japan in one way. The election cycle is drastically shortened, with Ishiba calling a general election before he even took office on October 1. It was all over in less than a month.
The LDP won just 191 seats against 148 for its main opposition, the Constitutional Democratic Party, which saw a dramatic uptick from its 98 seats in the last election. Even with the LDP’s political partner, Komeito, and its 24 seats, the ruling coalition can’t command the 233 seats necessary to control Lower House votes.
“Voters have handed us a harsh verdict, and we have to humbly accept this result,” Ishiba told national broadcaster NHK. He said prior to the election that his new administration “be judged by the people as soon as possible,” but he doesn’t seem super-keen on accepting the verdict. He has vowed to stay in office despite his gamble backfiring.
Ishiba called the snap election to clean the slate after the slush-fund scandal that brought down his unpopular predecessor, Fumio Kishida. Ishiba is popular with the public as a whole but relatively unpopular within his own party, where he’s seen as a bit of a troublemaker. This was the fifth time he’d run for head of the party.
Shortly after I moved to Asia in early 2001, Junichiro Koizumi became prime minister of Japan. He brought a breath of fresh air to stale Japanese politics, with his curly hair, relative youth — he was 59 at the time when most leaders had been well into their 70s — and a raft of new policy ideas. It was an unwritten rule around that time that any description of him had to use the term “maverick.”
He wasn’t all that wild and crazy to be honest, but he did promise change. Prior to his election, Japan had a revolving door of largely interchangeable politicians who didn’t achieve much, last long, or linger in the memory. Ishiba fits that old pattern.
It’s an appropriate twist of timing that Koizumi’s son, Shinjiro Koizumi, has resigned to take responsibility for the results. Ishiba, who is 67, selected the younger Koizumi, 43, as his election strategy chief. That co-opted a rival, with Koizumi finishing third in the race to head the LDP, but Koizumi remains a rising star and potential prime minister in the making.
Ishiba, who says he won’t form a coalition, is going to attempt to govern while his party lacks a majority, at least in part because the political opposition is in virtually equal disarray. But there’s likely to be a challenge against his leadership from within the LDP at the first signs of weakness.
It is unlikely that Ishiba, frankly, is going to achieve much, or last long. Under the stewardship of the late leader Shinzo Abe, the LDP had pioneered a course of dramatic reform in conjunction with the BOJ. With the central bank’s inflation target of 2% now achieved with relatively regularity, the central bank has been attempting to raise rates. But the BOJ is able to do so only painfully slowly.
The currency weakness comes now that it is unlikely to rock a boat sailing on choppy waters. Until there’s greater political certainty, expect the weak yen to continue, providing future support for Japanese equities.
