Snapshot

Japanese prime minister hopefuls point to higher spending

We had warned investors that Suga’s dreadfully low approval rating left his status as prime minister of Japan in a vulnerable position (see: Is Suga’s race run as Japan’s premier?)

Only a few weeks later, Suga has now announced that he would not be seeking re-election in his party’s leadership election on September 29th. He is essentially stepping down as prime minister.

With a general election also looming, it is widely expected that the ruling Liberal Democratic Party (LDP) remains the dominant force in Japanese politics due to weak opposition, which has been divided for some time. So the party leadership contest effectively paves the way for a new prime minister.

Equity investors rejoiced on the news, with the TOPIX index closing 1.6% higher on the day of the announcement and 1.3% higher the next. This partly reflects some clarification on the broader election timetable and some anticipation of more fiscal stimulus in Japan.

The latter would be in-line with recent comments from former foreign minister Kishida – the only other contestant in the running at the time.

Over the weekend, more candidates have thrown their hat into the ring. They include Taro Kono (vaccine roll-out minister) and Senae Takaichi (a former minister of internal affairs and communications), who reportedly now has the support of influential former prime minister Abe.

Abe’s support is important as the party tends to vote in factions, so it could help Takaichi jump over the hurdle of 20 supporters required to enter the race.

More candidates could also run, including Shigeru Ishiba (former defence minister), Seiko Noda (former minister for internal affairs) and Shinjiro Koizumi (environmental minister).

It is unclear who will win the leadership election. The frontrunners at this stage – Kishida, Kono and Takaichi – broadly favour more fiscal spending but have also signalled a slightly more hawkish approach to China.

This could see Japan strengthening its alliance with the US, renew energy to formally recognise Japan’s armed forces and boost defence spending.

The economic backdrop is one where the Japanese outlook is getting brighter; GDP growth should improve from 2.2% this year to 2.8% next year.

Progress on Japan’s vaccine roll-out means the country should now reach herd immunity by the end of the year. This would pave the way to a boost in consumption from pent up demand.

Meanwhile, investment plans remain relatively strong and should be bolstered by a recovery in corporate profits and fiscal stimulus. As supply bottlenecks in global supply chains improve, activity should also get an additional boost from firms restocking their inventory next year, which will also help support wider manufacturing demand.

Looking back at Suga’s term, despite poor management of the vaccine roll-out, he was able to make some positive steps on Japan’s structural reform agenda. Suga cut mobile phone charges, pushed for families to have infertility treatment under health insurance and took steps to promote digitalisation in government.

His biggest policy announcement was Japan’s ambition to achieve net zero carbon emissions by 2050.

Stepping back, ultimately more frequent leadership changes are likely to disrupt policies under structural reform which take time to implement and even longer to see results.

Suga’s agency for digital government, for example, was only launched two days before he announced his departure.