What Japan’s Middle-of-the-Road New Leader Means for Markets

(Bloomberg) -- After a monthlong, surprisingly competitive race for Japan’s new leader, the contest ended predictably: Fumio Kishida, the most experienced, most middle-of-the-road candidate, is set to become Japan’s 100th prime minister. 

For good or ill, Kishida is seen by investors as a continuity choice -- stable, but unlikely to energize markets much. Early in the race, foreign investors and retail traders were intrigued by the potential of a Taro Kono victory, attracted by his fluent English, reformist leanings and social-media savvy. 

“Kishida is likely to generate the weakest equity market moves” of the candidates, Goldman Sachs Group Inc. economist Naohiko Baba wrote in a report, “particularly since his reformist views appear somewhat weak and his stance on fiscal discipline is cautious.”

Stock market reaction to Kishida’s victory was muted on Thursday, with the Topix falling 0.4%. 

Delivering a fresh stimulus package that won’t disappoint investors will be Kishida’s next challenge. He’s pledged to be nimble about spending as the economy heals from the pandemic, and after Wednesday’s victory he repeated his promise to compile a package worth “tens of trillions” of yen before the end of the year. 

Kishida’s support for lifting virus restrictions and restarting the popular “Go To Travel” discount program may get equity investors to take another look at train operators and airlines, just as the country’s latest state of emergency is set to end this week. 

Kishida’s win is not “the end of a catalyst, but the setup for several more positive drivers,” wrote Mark Haefele, the chief investment officer at UBS Global Wealth Management in a Sept. 30 note. “As general election campaigning kicks off, Kishida will likely focus on more specific spending pledges, revealing potential sector beneficiaries.”

Stable, Boring

Longer term, Kishida will need to signal when Japan should shift its focus back to balancing the budget. Kishida has sounded hawkish on the government’s debt in the past, even broaching the idea that another hike in the sales tax might eventually be needed to generate revenue, although he’s said it wouldn’t be this decade.

While investors might not be overly excited by a continuity administration, in an election year, stability might be a good thing. Japan’s stocks lagged other markets for much of this year amid concern that the unpopularity of outgoing prime minister Yoshihide Suga might cause the LDP to lose seats in this autumn’s general election. 

Kishida’s leadership should ensure a solid victory, said John Vail, the chief global strategist at Nikko Asset Management Co.

“This should lead to hopes for the cabinet’s longevity, which consumers, corporations and investors should view positively,” Vail wrote in a note Wednesday. 

‘New Capitalism’

Kishida, however, is not Abenomics 2.0. He’s said Japan needs to narrow the wealth gap that widened under the market-friendly policies of former Prime Minister Shinzo Abe, where wage gains lagged rising asset prices. 

He has dangled the idea of a “new type of Japanese capitalism,” favoring redistribution and wage increases, but has been vague on details of how he’ll get it done. 

Still, economists don’t see Kishida pressuring the Bank of Japan to change tack anytime soon, as he’s been vocal in his support of the bank’s aggressive easing and its 2% inflation target.

One key decision Kishida faces is whether to replace long-serving finance minister Taro Aso, who’s held the powerful post in the nearly nine years of the Abe and Suga administrations. Kishida said Wednesday he wanted his Cabinet to skew younger than Suga’s did, while Aso turned 81 earlier this month. 

Should he last longer than Suga, an equally big decision looms with Haruhiko Kuroda’s term as BOJ governor set to expire in early 2023.  

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