Kishida looks to put his own stamp on Japanese economy
The "new capitalism" proposals of new Japanese prime minister Fumio Kishida will help well-run companies stand out to public and private equity investors, market observers believe.
However, the new prime minister, who worked closely with his two predecessors, Shinzo Abe and Yoshihide Suga, is unlikely to make drastic changes to the government's economic policies, for example by walking away from Abenomics, at least before the Bank of Japan's new governor takes office in April 2023.
Instead, the market thinks Kishida’s proposals such as tax incentives for employers to increase wages, and enhancing Japan’s competitiveness in key areas like chipmaking, will make Japan more attractive to investors.
“We understand that the market consensus for the Kishida cabinet is that there will be no significant change in economic policies especially in both monetary and fiscal sides, and is not seen as shifting away from Abenomics,” said Kensuke Niihara, Japan chief investment officer with State Street Global Advisors.
Abenomics, which refers to increasing the money supply and government spending to stimulate the economy, has defined the Japanese economy since 2012.
“Kishida emphasises both redistribution and growth. The market was once concerned about a change in financial income tax to support redistribution, but it was pulled down, and the government showed no intention to change value-added tax (VAT). All in all, the cabinet is expected to go with the existing framework,” Niihara said.
“In the short to middle term, the Japanese economy could be relatively supported by cyclical recovery due to better Covid-19 condition and Covid-related fiscal policies, which would support the overall equity market,” Niihara added.
SOMETHING NEW
After replacing Suga on Oct 4, Kishida has proposed “new Japanese capitalism”, which seeks to alter the current neoliberal policies of the Liberal Democratic Party. The party has been in government for most of the period since the end of the Second World War.
One pillar of the “new capitalism” is to strengthen Japan’s economic security, by sharpening Japan’s independent and dominant status in areas such as chip manufacturing. The Taiwan Semiconductor Manufacturing Company (TSMC) has just announced it will build a new factory in Japan that will cost $7 billion in making.
“This is important in terms of making Japan's market more open and attractive to foreign firms and investors. Absorbing good foreign firms through reforming institutions system would be a critical challenge for Kishida's administration,” said Yoshikazu Kato, research fellow at Rakuten Securities Economic Institute based in Tokyo.
State Street’s Niihara also noted the policy discussions around economic security, support for digitisation, the reactivation of nuclear plants and multi-year budgeting. “However, there is nothing confirmed yet and we expect limited impact on the markets for the time being,” Niihara noted.
Kishida will only be able to move forward with his economic agenda if the LDP wins the general election for the House of Representatives convincingly on Oct 31.
“All eyes will focus next on whether the LDP obtains the political capital it needs in order to push through industrial policies that may improve Japan’s productivity and growth potential in new areas such as renewable energy,” said Tomo Kinoshita, global market strategist at Invesco Japan.
“During his acceptance speech, Kishida pledged a significant government stimulus worth around 30 trillion yen ($263 billion) before the end of the year. From an economic perspective, Kishida’s robust pandemic-recovery package further supports the country’s rebound and may be positive for Japanese equities,” Kinoshita said.
BOJ AND ETF
“Kishida is known to be a political centrist and viewed as being market-friendly. It’s unlikely that there will be any significant changes to Japan’s political economy framework, and the Bank of Japan’s loose monetary policies should continue as the current term of the BOJ governor Haruhiko Kuroda lasts until April 2023,” he stressed.
No one is sure if the central bank will taper its decade-long purchases of Japanese exchange-traded funds (ETFs) that have made it the biggest investor in that market, with assets of about 50 trillion yen ($439 billion).
The proportion of passive investments in Japanese equities are at record high levels, which make up over 70% of publicly-offered equity investment trusts, and over 80% of the equity portion of public pensions. "This is highly inefficient," noted Kenichi Hirayama, chief investment officer at Tokio Marine Asset Management.
“If the BOJ is to cut purchase on domestic ETFs, passive inflows will largely decrease into all companies,” Hirayama said.
He thinks this could further widen the gap in corporate governance between well and poorly performing companies, and create opportunities for active investors that can spot quality companies through active research of both public and private equity investments.
Corporate governance, long-term stability, and digital transformation will be the three main focuses of Japan’s future economic development, Hirayama noted.
“Corporate governance is always a big thing under Abenomics. We see that continuing under Kishida. And the policy discussions into ‘new capitalism’ have also been covering this topic,” Hirayama said.
BUSINESS AS USUAL
Hirayama does not think new policies will mean any changes for the country's public pension funds.
“From a political standpoint, we don’t think Kishida will make any move towards asset owners. He is not expected to push for drastic increases in equity allocations, for example. Looking at the big public pensions, because of their size, it means that they have to move quite slowly for any possible allocation changes,” Hirayama said.
“We don’t see any big shift in Japanese asset owners’ asset allocation strategies,” Hirayama said. “Both public and private pension funds will continue to gradually raise allocation to alternative assets,” he said.
Invesco’s Kinoshita said he is also interested in how Japan’s relationship with China will develop under the new administration. “Kishida, a former defense minister in Abe’s government, is known as a foreign policy hawk and has emphasised the importance of strengthening the US-Japan alliance,” he noted.
Market observers have interpreted the recent decision by the world’s largest pension fund, Japan’s Government Pension Investment Fund (GPIF), to exclude Chinese government bonds from its foreign bond portfolio, as a political move.
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