Markets Eye Japan Elections as Firms Turn Sour on Premier Suga

(Bloomberg) -- As Japanese Prime Minister Yoshihide Suga heads into weeks that could determine his political fate, a survey shows most firms want him replaced and investors are wondering if they may need to recalibrate their market strategies.

A corporate poll from Reuters published Friday said a majority of firms see the Suga government as a threat to the economy. Public opinion polls have plunged to new lows, with many respondents critical of his virus management as the country battles record infections and is trying to speed up a vaccination program, that -- while rapidly closing the gap -- still ranks last among Group of Seven nations.

While Suga, who took office in September 2020, has the support for now of several powerful factions in the ruling LDP, any further slips with pandemic management may open an avenue for a replacement and send Suga toward the revolving door that dispatched six prime ministers in five years before his predecessor.

“The market is starting to get interested,” Naohiko Baba, the chief economist at Goldman Sachs Group Inc. in Tokyo, wrote in an Aug. 17 note. 

The Topix index has fallen 2.2% since the start of June as Suga’s approval ratings slipped, compared with a 5% gain in the S&P 500 and a 4% advance in the MSCI Europe Index. The selling pressure in the stock market could increase amid concerns Suga is headed for an exit.

The next test for Suga comes in a Sunday election for mayor of Yokohama, the country’s second most-populous city where he began his political career. Suga has staked his political capital by publicly backing one of his former aides in the race, Hachiro Okonogi, and a loss would be stinging embarrassment for the premier.

The LDP faces a general election that must be held by the end of November and jostling for succession is beginning within the party as Suga’s support in some polls falls below the 30% that’s regarded in local politics as a make-or-break level. 

According to reports Wednesday, Hakubun Shimomura, an LDP heavyweight, plans to challenge Suga for the party’s top spot. The Reuters survey showed firms favored vaccine czar and former Foreign Minister Taro Kono to replace Suga. Its survey canvassed 503 large and midsize non-financial firms, and about half responded.

Masahiro Yamaguchi, a senior market analyst for SMBC Trust Bank Ltd., points out that foreign investors are particularly sensitive to signs of political instability. When Suga’s predecessor, Shinzo Abe, announced his resignation in August last year, overseas investors sold Japanese stocks for five straight weeks. 

But the general election might be good for stocks regardless of who wins, Nomura Holdings Inc. strategists led by Yunosuke Ikeda wrote in an Aug. 13 note. Others say Suga may unveil an economic stimulus package, which could juice markets as well as his own prospects. 

Foreign investors “tend to be net buyers of Japanese equities” ahead of lower house elections, due to “an increase in expectations for what might come after the election, be it the new administration or economic measures,” the Nomura strategists wrote.  

Consistently low support for the main opposition party means the LDP is unlikely to be ousted in the coming election, but it could lose enough seats to make it more difficult to pass legislation. The support rate for the Constitutional Democratic Party has been long mired in single-digit territory.

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