At the very end of September, Japan – or more accurately LDP parliamentarians and members – selected the country’s next Prime Minister. After a single vote victory in the first round, Fumio Kishida won by a resounding margin in a second round run-off as votes for less favoured candidates were transferred to him and the weighting of rank-and-file member votes was reduced as per internal election rules.

The final numbers showed Kishida to be a politicians’ politician – much more popular amongst his peers than he is with party members or the electorate at large. Considered by many as a safe pair of hands, few would accuse him of being overburdened with charisma. His vanquished opponent, Taro Kono, is almost precisely the opposite; hugely more popular with voters and party members – and foreign investors – but considered uncontrollable and perhaps just too liberal for the Liberal Democratic Party he sought to lead.

Fortunately for Kishida, the official opposition is a shambles so a strong mandate to govern still seems an inevitability come the parliamentary election on 31st October. But dismal early polling on the new Kishida cabinet, which put its popularity well behind the fresh Suga cabinet of a year ago¹ , combined with a milk-and-water head man suggests that the LDP’s majority could be much smaller than it might have been under Kono who has, of course, been demoted.

In purely political terms a Kishida premiership looks like a missed opportunity; a compromise candidate selected to not rock the boat is unlikely to make many waves either. As Japan’s 100th Prime Minister in 136 years, Kishida will know that odds are against his being a long tenure. A resumption of Japan’s “revolving door” should not cause panic, but it is easy to see why it might elicit a sigh of familiar disappointment amongst investors hoping for more.

But what about actual policies? In the run-up to the internal vote, Kishida emphasised the importance of a fiscal support package “sized at several tens of trillion yen”². It has long been our view that the real economy or market impact of such packages is usually enormously over-stated. The pump-priming, high-multiplier argument for expansionary fiscal policy holds little water in Japan, where such spending is usually sterilised early. Ultimately, Japan is a country that has proven itself more willing to save at zero rates than to spend or invest.

That said, Kishida has also espoused the need to close the gap between rich and poor in the country, hinting that any fiscal package of his making would be directed at those on lower incomes. When money is tight, incremental income is more likely to be spent than saved (or so the theory goes) so perhaps this time the impact upon consumption will be higher than we might have assumed. It is telling that discount retailers fared well on the news of Kishida’s victory.

In truth though, any pro-inflation policy would probably just be fuel to an already kindling fire. Consumption and confidence data shows clearly that Japanese people want to consume more, and they likely will as the country’s various states of emergency were allowed to roll-off at the end of last month.

It is worth noting, though, that the mid-term historical trend for consumption has been extremely muted. This is a function of Japan’s ageing population; an issue which is not going away and of which investors should be highly cognisant when considering consumption related stocks.

Clearly the rub with Kishida’s redistributive agenda is from where, or from whom, that cash will be redistributed. Between the end of September and the publication of this note the Japanese stock market has slumped in what has come to be known as the “Kishida Shock”. Whether this is a case of causality or coincidence is unclear, but the suggestion by Kishida in a post-victory speech that capital gains tax could be hiked from 20% to 25% cannot have helped³. In this context, Kishida’s political weaknesses could work in investors’ favour. As the head of the just the fifth largest party faction he relies upon support from other heavyweights, notably Abe and Aso, former PM and Finance Minister respectively, neither of whom seem keen on a hike in CGT. Perhaps some of the market concern is overdone.

To summarise, we would caution – as ever – against over-emphasising the likely impact of specific political personnel on the market in the mid to long-term. Japan is affected much more by factors outside of the significant influence of the PM, both domestic and international, than they are those in his gift to control. Near-term consumption is a good case in point – Japan’s pandemic recovery should determine the direction of travel, with policies perhaps just boosting the speed. We are mildly disappointed that Kono missed out. His narrative for structural reform was a “higher PE” story with more legs than any fiscal package, but we are far from heart-broken, and do not think that investors should be too disheartened either.

¹ The Japan Times, What Kishida’s Cabinet Picks Tell Us, October 2021
² Japan’s new premier Kishida to sustain big fiscal, monetary support – for now | Reuters 
³ Japan stocks suffer ‘Kishida shock’ as new leader suggests tax rise | Financial Times (ft.com)