Will Japan’s new Prime Minister revive the country’s economy?
- The Nikkei hit new highs, the yen weakened, and long bond yields rose on the appointment of Sanae Takaichi
- Takaichi has declared her support for fiscal stimulus, careful industrial policy and a dovish monetary policy
- However, the fragility of the bond market combined with internal party divisions are likely to temper any fiscal excesses
Japan gained its own iron lady this week, as Sanae Takaichi became the country’s first female Prime Minister. A self-confessed admirer of Margaret Thatcher and heir to Japan’s reforming Shinzo Abe, it is yet to be seen whether she will be given the freedom to bring about radical change in the Japanese economy, but markets are optimistic.
Takaichi has declared her support for fiscal stimulus, careful industrial policy and a dovish monetary policy. This has got markets excited, with the Nikkei hitting new highs, the yen weakening, and the pressure on the long end of the bond market as investors anticipate more issuance. It adds to the growing buzz around Japanese equities, which have already received a boost from corporate governance reforms.
However, Sree Kochugovindan, senior research economist at Aberdeen, says some of these moves may be premature. “The details of Takaichi’s election campaign reveal a softer stance on monetary and fiscal easing than the headlines might suggest. Takaichi proposes targeted fiscal measures to help ease inflation pressure on households, but she has also acknowledged the need for fiscal constraint given Japan’s high debt ratio.”
She believes that the fragility of the bond market combined with internal party divisions are likely to temper any fiscal excesses. There have already been problems in Japan’s long-dated bond market this year. A 30-year bond auction this week passed off without incident, but previous bond auctions have seen wobbly demand. Japan can ill-afford to rattle the bond markets.
There is a question over whether Takaichi’s leadership will stimulate Japan’s industrial sector. She has promised support for areas such as AI, chips, quantum computing and cyber defence. These are all crowded areas, and it is not at all clear that Japan will be in a position to build strength in these sectors – certainly not enough to rival China, Taiwan or Korea.
However, there is still a lot to like about the Japanese market. The corporate governance reforms continue at pace and continue to drive shareholder value. Merger and acquisition activity is picking up. Conglomerates are breaking up and reforming, creating more orderly and sensible ownership of Japanese assets.
Takaichi is unlikely to be Abe 2.0, but she doesn’t need to be. The Japanese economy is already changing, and the corporate sector is undergoing significant reform. At the margins, she may be able to create a more benign outlook for the equity market, but the corporate governance story is likely to be the more important.
