Kishida’s Win May Lift Cloud of Uncertainty Over Japan Stocks

(Bloomberg) -- The second-biggest gain of the year for Japanese stocks suggests the uncertainty hanging over them may finally be near an end and a period of outperformance lies ahead.

For much of 2021, Japan investors have played Whack-a-Mole with unpredictability, every time one worry was squashed, another would pop up. From concern about the pace of vaccinations, to the fate of the Olympics, to former Prime Minister Yoshihide Suga saying he wouldn’t seek re-election.

But now his replacement Fumio Kishida’s better-than-expected election victory has put paid to pessimistic polls that suggested a bad night was in store for the ruling party. Markets responded with the Nikkei 225’s biggest gain since June, with the benchmark closing at the highest since Kishida was elected leader of the Liberal Democratic Party in September. 

“The election outcome is seen as positive for Japan, because it is viewed as one of political stability,” wrote Alvin Liew, senior economist at United Overseas Bank, in a note on Monday. “The winning margin allows Kishida the ease of passing legislation including key budget proposals and potentially a year-end fiscal stimulus package.” 

Stimulus Boost

Kishida’s stimulus package is potentially worth 30 trillion yen ($262 billion), and may include cash handouts to households. Combined with the expected resumption of the popular Go To Travel subsidy campaign, that’s a solid backdrop for Japan’s consumer shares. 

On the currency front, the yen is trading around a four-year low against the dollar, having weakened over 9% this year, a boon to the country’s many exporters. 

Meanwhile, the pandemic is at its lowest ebb in well over a year, with daily cases having dropped more than 99% since the peak. 72% of the total population is fully vaccinated. And while rising bond yields are stoking concerns elsewhere, the Bank of Japan’s control of the debt market means there’s little threat of destabilizing moves. 

Tis the Season

Furthermore, the fourth quarter historically tends to be positive for Japanese stocks, as companies boost conservative earnings forecasts as they enter the second half of their fiscal year. 

Still, investors have to be wary of a second “Kishida Shock” -- a term observers used for the market selloff on concern on his taxation policies. 

The key for Kishida will be not only the stimulus plan, but “also how the public view progress on his primary policies, especially his growth strategies and income redistribution plans,” said Naohiko Baba, an economist with Goldman Sachs Group Inc. 

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