Abe’s departure after mixed economic results to test market confidence

Seven years ago on Wall Street, Prime Minister Shinzo Abe urged investors to “buy my Abenomics,” promising to chart a path to growth for a deflated Japan.

Fast-forward to 2020, and Abe, now Japan’s longest-serving prime minister, is resigning due to poor health, leaving an economy that is smaller, badly hit by the novel coronavirus pandemic, and with more debt than when. returned to power in 2012.

Anyone who gets what some lawmakers call the “last straw” in the ruling party leadership race in mid-September, the next prime minister may struggle to win market confidence in post-Abenomics Japan. according to market watchers.

“Political uncertainty will weigh on the market until his successor is selected, although there shouldn’t be a sharp drop in stocks,” said Makoto Sengoku, a market analyst at Tokyo’s Tokai Research Institute. The Nikkei is expected to remain between 22,000 and 23,000, he said.

When Abe returned to power, the Nikkei Stock Average was trading around the 10,000 level. The index ended on Friday, the day Abe announced he was resigning, at 22,882.65 after climbing a 27-year high in 2018.

The prime minister’s “Abenomics” program was three-pronged, focusing on a bold Bank of Japan monetary easing, flexible fiscal policy and structural reform to stimulate growth.

Initially, it lifted stocks and weakened the yen, a boon for the country’s export-dependent economy. A weaker yen strengthens the price competitiveness of products made in Japan abroad and raises the profits made abroad when they are repatriated.

Economists and market analysts say the new coronavirus pandemic, which led to a record 27.8 percent contraction in Japan’s gross domestic product in the April-June quarter, gives the next leader little room for maneuver. to drastically alter the current political framework.

But some say financial markets are on the lookout for surprises and closely monitoring whether Abe’s departure will affect the BOJ and Governor Haruhiko Kuroda, whose current term runs through April 2023.

There are concerns about whether the current large-scale monetary easing, including purchases of exchange-traded funds, a key factor supporting market sentiment in Tokyo, will continue, they said.

But Martin Schulz, chief policy economist at Fujitsu Ltd., said it was “pretty certain” that monetary policy should be expansionary during the virus outbreak, adding that Abenomics has built a close link between fiscal and monetary policies that did not it can be easily broken “no way”. soon. “

“The new prime minister will need a new agenda,” he said. “As Abenomics’ limitations have become obvious, international investors will have a very close look at the next reform agenda.”

The Abe government and the BOJ agreed in 2013 to strengthen policy coordination and “work together” to combat deflation.

While the government has increased spending to support the economy, the central bank has stepped up asset purchases, absorbing massive amounts of Japanese government debt, thus now owning more than 40 percent of outstanding bonds.

According to the International Monetary Fund, Japan is expected to see its debt-to-GDP ratio rise to 251.91 percent in 2020, the worst among advanced economies.

The size of real GDP, meanwhile, was 498 trillion yen when Abe returned, but it fell to 485 trillion yen in the three months to June, affected by the spread of the virus, according to government data.

A relatively bright spot is the improving job market, with the unemployment rate falling to 2.8 percent in June from 4.3 percent when Abe took office.

“I shot the three arrows (of Abenomics) to defeat two decades of deflation and as an important political agenda we have been aiming to create a market where people who want to work can find work,” Abe said in the press conference in which he announced your intention to resign. “More than 4 million jobs have been created.”

Female participation in the workforce has been on the rise as the country has grappled with an acute labor shortage. However, Abe failed to deliver on her promises to reduce the number of children on waiting lists for daycare to zero, and work style reforms are still half-done.

Abe strongly urged companies to raise wages so that consumers loosen their pockets, hoping for a rebound in consumption that will push prices closer to the 2 percent inflation target.

The BOJ is still far from that target and only a 0.3 percent year-on-year increase in the consumer price index, excluding fresh foods, is projected for fiscal 2021.

Despite the mixed results of nearly eight years from Abe’s economic program, Takuya Hoshino, an economist at the Dai-ichi Life Research Institute, said Abe’s efforts to boost employment were “in the right direction.”

“That said, when the jobs created were in sectors that are in desperate need of labor and were filled by women who need to work part time after raising children or the elderly, we cannot expect strong wage growth,” he said.

The ruling Liberal Democratic Party is preparing for elections to choose its leader and thus the next prime minister. Chief Cabinet Secretary Yoshihide Suga, Abe’s right-hand man, has emerged as a strong candidate, joining former Foreign Minister Fumio Kishida, currently LDP policy chief, and former Defense Minister Shigeru Ishiba.

Economists and analysts say Suga and Kishida would seek to maintain the status quo, while Ishiba could be a wild card. In an interview with a magazine, Ishiba, a critic of Abe, questioned that Japan places an “excessive” emphasis on financial capitalism that seeks to benefit shareholders. He highlighted the need to support small and medium-sized enterprises, as well as regional economies.

Suga, who has been in charge of crisis management and acts as the public face of the Abe administration, is expected to win the support of many LDP lawmakers. Ishiba, however, ranked first in a Kyodo News poll conducted over the weekend as the person most favored by the public to become the next prime minister. Respondents also said that the response to the novel coronavirus and the economy were the top two priorities the next government should focus on.

“The Japanese markets have enjoyed a condition where there was almost no political risk, but that advantage may disappear in the future,” said Norihiro Fujito, senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities Co. “An unstable government is what that foreign investors don’t like any more. “