Japanese Prime Minister Yoshihide Suga has announced that he will not run for the ruling Liberal Democratic Party’s (LDP) presidential election, expected to be held on 29 September. His recent approval rating had dropped below 30% – historically a ‘danger zone’ for an incumbent prime minister. The defeat of a candidate backed by Mr. Suga in the mayoral elections in his hometown of Yokohoma earlier was a definitive forewarning and discontent was brewing at his handling of the pandemic crisis.
The prime minister’s resignation is a positive development for markets as the LDP’s chances at the elections appeared weakened with the incumbent at the helm. Consequently, markets were wary of a potentially unwelcome policy shift. Mr. Suga now needs to step down from his roles both as the party president and as Japan’s premier. Since there might not be enough time to hold the Lower House elections on 5 October, it will need to be postponed to 21 October, with the actual voting expected to happen by 28 November.
Prospective Candidates and Potential Outlooks
Several party members have expressed interest in running for the LDP's presidential election. The high profile among them are as follows:
Fumio Kishida, former minister for foreign affairs in Shinzo Abe’s cabinet
Taro Kono, an experienced cabinet member and currently the minister for administrative and regulatory reform, charged with overseeing digitization and vaccination efforts
Sanae Takaichi, who, if elected as LDP's president, could become Japan's first female premier
Shigeru Ishiba, former secretary general of the LDP and minister in charge of regional revitalization
A candidate needs to have the endorsement of at least 20 party members to run for the presidential election. Mr. Kishida (declared as a candidate) leads a faction with sufficient size, while Ms. Takaichi has yet to secure the required 20 endorsements. Both of these candidates represent continuity. Of the more reform-minded figures, Mr. Kono has yet to endorse his candidature officially, but he could prove to be the proverbial dark horse. Mr. Kono enjoys popularity among LDP supporters and is a member of a faction led by Deputy Prime Minister Taro Aso, the second largest in LDP. Mr. Ishiba is the least likely to succeed despite having his own faction, as he has positioned himself as an internal dissident. For the same reason, he would also represent the most uncertainty over Japan’s future policy path.
The priority of the incoming prime minister will be to formulate a response to the COVID-19 challenge and lay out a path for the eventual reopening of the economy. Japan’s vaccination rate has accelerated since June, gradually narrowing its gap with other developed countries. However, albeit the rate of infections trending down, there is considerable strain on the health infrastructure, which may take a month or two to abate.
Macro Outlook to Worsen in the Short Term
We are likely to see a third fiscal stimulus package, expected to be north of ¥30 trillion (5.7% of GDP), even though the government has struggled to disburse previously allocated supplementary budget funds. Nonetheless, additional funds allocated for the “Go To Travel” campaign, intended to reinvigorate the Japanese economy, and for digitalizing the economy should prove to be a shot in the arm for the economy once health restrictions are lifted.
We have downgraded our macro outlook for the third quarter, after the state of emergency in Tokyo and Okinawa was expanded to more prefectures. This extension of emergency threatens to drag down services consumption, which has been resilient until now, and presents downside risks for the 2021 GDP forecasts (Figure 1). Mobility has also fallen since July, implying a stronger behavioural response from households. Supply-side bottlenecks in the manufacturing sector, particularly autos, are likely to weigh on durables consumption through the yearend.
Figure 1: Japan Lags in Consumption Recovery
The macro policy direction in the short to medium term will likely be a continuation of the Abe/Suga regime. In all probability, the incoming premier will need the support of the Abe faction, which makes any deviation from the existing expansionary/reformist approach unlikely. Most of the contenders have worked closely with Mr. Abe or Mr. Suga in past administrations – this means there is a likelihood for the continuation of the expansionary macro policies, which should be supplemented by structural reforms. We expect status quo on the monetary policy front. Governor Haruhiko Kuroda will serve until the end of his term in April 2023, with the Bank of Japan expected to maintain its accommodative policy stance.
In regard to foreign policy, the US-centred alliance approach is likely to continue, but each candidate differs in terms of their particular approach to geopolitical affairs. For instance, Mr. Abe strongly believed that domestic pro-growth policies were a necessary pillar to project strength abroad, so Abenomics also had a geopolitical dimension.
Mr. Suga's declining popularity was a major source of uncertainty ahead of the LDP elections and markets reacted positively when he decided to step down. TOPIX, for instance, touched 2,017, a level not seen since 1991. Based on current trends, we believe domestic politics are likely to continue to be supportive of equities. The development is probably more neutral for USD/JPY unless the election delivers a surprise.
The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without State Street Global Advisors’ express written consent.
The views expressed in this material are the views of Kaushik Baidya and Elliot Hentov through 09 September 2021 and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your tax and financial advisor.
All information is from State Street Global Advisors unless otherwise noted and has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
Past performance is not a guarantee of future results. Investing involves risk including the risk of loss of principal.
The trademarks and service marks referenced herein are the property of their respective owners. Third party data providers make no warranties or representations of any kind relating to the accuracy, completeness or timeliness of the data and have no liability for damages of any kind relating to the use of such data.
For EMEA Distribution: The information contained in this communication is not a research recommendation or ‘investment research’ and is classified as a ‘Marketing Communication’ in accordance with the Markets in Financial Instruments Directive (2014/65/EU) or applicable Swiss regulation. This means that this marketing communication (a) has not been prepared in accordance with legal requirements designed to promote the independence of investment research (b) is not subject to any prohibition on dealing ahead of the dissemination of investment research.
SPDR ETF is the exchange traded funds ("ETF") platform of State Street Global Advisors and is comprised of funds that have been authorised by European regulatory authorities as open-ended UCITS investment companies.
SSGA SPDR ETFs Europe I and II plc issue SPDR ETFs, and is an open-ended investment company. The Company is organised as an Undertaking for Collective Investments in Transferable Securities (UCITS) under the laws of Ireland and authorised as a UCITS by the Central Bank of Ireland.
ETFs trade like stocks, are subject to investment risk, fluctuate in market value and may trade at prices above or below the ETFs net asset value. Brokerage commissions and ETF expenses will reduce returns.
SSGA SPDR ETFS MAY NOT BE AVAILABLE OR SUITABLE FOR YOU. THE VIEWS EXPRESSED/INFORMATION IN THIS SITE DOES NOT CONSTITUTE INVESTMENT ADVICE, FINANCIAL, LEGAL, REGULATORY, ACCOUNTING OR TAX ADVICE. INDEPENDENT ADVICE SHOULD BE SOUGHT IN CASES OF DOUBT. NEITHER THE INFORMATION NOR ANY OPINION CONTAINED ON THIS SITE CONSTITUTES A SOLICITATION OR OFFER TO BUY OR SELL SHARES OF THE FUNDS OR ANY OTHER FINANCIAL INSTRUMENT.
Standard & Poor's®, S&P® and SPDR® are registered trademarks of Standard & Poor's Financial Services LLC (S&P); Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC (Dow Jones); and these trademarks have been licensed for use by S&P Dow Jones Indices LLC (SPDJI) and sublicensed for certain purposes by State Street Corporation. State Street Corporation's financial products are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, their respective affiliates and third party licensors and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability in relation thereto, including for any errors, omissions, or interruptions of any index.
SPDR ETFs may be offered and sold only in those jurisdictions where authorised, in compliance with applicable regulations.
Information related to Mexico
This information does not constitute and is not intended to constitute marketing or an offer of securities and accordingly should not be construed as such. The Funds referenced herein have not been, and will not be, registered under the Mexican Securities Market Law (Ley del Mercado de Valores) and may not be publicly offered or sold in the United Mexican States. Disclosure documentation related to any of the aforementioned Funds may not be distributed publicly in Mexico and shares of the Funds may not be traded in Mexico.
You should obtain and read a prospectus and KIID relating to the SPDR ETFs prior to investing. The prospectus/KIID describing the characteristics, costs, risks and other relevant information of SPDR ETFs are available for residents of countries where SPDR ETFs are authorised for sale on the SPDRs website or from Cecabank, S.A. Alcalá 27, 28014 Madrid (Spain) who is the Spanish Representative, Paying Agent and distributor in Spain.