By Investors have shown a relatively calm response to Japan’s recent political scandal, which is considered the largest in decades. The iShares MSCI Japan exchange-traded fund experienced a slight dip of 1% since December 14th when Prime Minister Fumio Kishida dismissed four cabinet ministers due to alleged campaign finance kickbacks. In comparison, the red-hot S&P 500 gained 1% during the same period. Despite the scandal, Japanese stocks are still up by an impressive 15% for the year 2023.
However, markets may need to start paying closer attention in the coming year. There is a possibility that the allegations of wrongdoing could spread and directly threaten the position of the prime minister himself. Jesper Koll, the Tokyo-based global ambassador for the Monex Group, expresses concerns and states, “It’s even odds that Kishida will not survive this.”
What is even more worrying are the government’s dreadful poll numbers. As of now, Prime Minister Kishida’s approval rating stands at a mere 22%. Yuko Nakano, who holds the Japan Chair at the Center for Strategic and International Studies, highlights that this is the lowest approval rating experienced by Kishida since he assumed power in October 2021. Additionally, his Liberal Democratic Party has fallen below the 30% mark for the first time since 2012.
This slide in popularity reflects a growing disillusionment among the public regarding the “new capitalism” that was meant to bring renewed hope to Japan’s financial markets. Nakano explains that “a lack of confidence in economic policy” is the main reason behind the disapproval.
In Japanese politics, frequent shifts in personnel are a common occurrence – there have been 64 prime ministers since 1945. However, steady policy-making based on consensus within the Liberal Democratic Party (LDP) and a strong, self-perpetuating bureaucracy have remained constants.
While there may be disagreements on certain fronts, there is a consensus within the LDP and among analysts that negative interest rates, which have caused the yen to fall by 20% against the dollar over the past two years, must be eliminated. It is anticipated that the Bank of Japan will raise interest rates from negative 0.1% to zero early next year. Shigeto Nagai, the head of Japan Economics at Oxford Economics, states, “The coming removal of negative interest rates is not expected to meet with much resistance.”
As Japan navigates through this political scandal, investors and analysts will continue to closely monitor its impact on the economy and financial markets. The upcoming year will surely be crucial in determining the fate of Prime Minister Kishida and the future direction of Japan’s economic policies.
The Shifting Impetus: A Contentious Fiscal Approach
The second prong of Japan’s reflationary strategy involves a contentious shift towards fiscal measures, primarily deficit spending. Prime Minister Kishida is pushing for tax cuts, despite the rapid increase in government outlays. These expenditures are driven by a doubling of defense spending and increased child credits aimed at encouraging population growth. To facilitate this, his cabinet passed an $87 billion supplementary budget set to be distributed by March.
Some conservative bureaucrats, however, are upset by this free-spending approach. Speculations suggest that they may be pushing back by levying corruption allegations against government officials who support Kishida’s agenda. Analysts like Koll argue that it is not a coincidence that the scandal emerged immediately after Kishida went against the ministry of finance in advocating for tax cuts.
Regardless of the underlying political maneuvers, Kishida’s reflation narrative seems to be falling on deaf ears among young Japanese. Surprisingly, they are not responding to his initiatives by opening their wallets and spending. According to Nagai, this lack of consumption stems from younger generations’ growing concern about future tax increases and diminishing pension benefits due to society’s rapid aging. As a result, they have been steadily increasing their precautionary savings.
Beyond Government Intervention: Driving Force in the Markets
Fortunately, Japan’s relatively bullish markets do not solely depend on government actions, says Koll. The Tokyo Stock Exchange has been instrumental in contributing to this positive outlook. Earlier this year, it announced a new requirement for listed companies trading below book value. These companies would be expected to present capital improvement plans.
Following this announcement, there has been a surge in corporate mergers and buyouts, reaching record levels. This trend suggests that managers are actively seeking ways to respond to the changing landscape. As Koll notes, the corporate metabolism is rapidly revving up, with new leaders aiming to make a lasting impact.
However, if Kishida’s legacy turns out to be one of disarray and disenchantment, it will not bode well for Japan. As one of the world’s oldest countries with a historical aversion to immigrants, kicking the can down the road will only exacerbate the fundamental problems faced by the nation. Oxford Economics’ Nagai argues that Kishida’s declining approval ratings reflect public frustration with his reluctance to confront these issues head-on.
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