Market Views: How will Japan's new PM impact equity, yen strategies?
The ascent of Shigeru Ishiba as Japan's Prime Minister marks a pivotal moment for the world's third-largest economy.
Ishiba's unexpected victory sent shockwaves through the financial markets, with Japanese equity futures initially reacting negatively.
The market turbulence reflects investor uncertainty about Ishiba's economic stance, particularly his past criticisms of ultra-loose monetary policy and his emphasis on wealth redistribution.
Areas that will come under the radar for investors include Ishiba's approach to monetary policy, his relationship with the Bank of Japan, and his views on fiscal policy and structural reforms.
Seasoned investors are also speculating that it could mark a different turn in Japan's economic journey,which in recent years has been shaped by the "Abenomics" policies of monetary easing, fiscal stimulus, and structural reforms.
While some progress has been made, the nation continues to face significant hurdles in achieving sustained economic growth and inflation targets.
As Japan navigates this period of transition, we asked investment experts and analysts how the new PM’s economic policies could influence Japan's equity market performance, and the yen carry trade in the coming year.
The following responses have been edited for brevity and clarity.
Nicholas Weindling, Japan equities portfolio manager
JP Morgan Asset Management
Japan’s equity futures markets reacted negatively as Ishiba is considered to favour equality and a hawkish monetary policy.
However, Ishiba has already started to adjust his comments on economic policies, reiterating his intention to inherit Kishida’s economic policy and focus on wage increases.
There is a possibility that he will further soften his stance, and we think that the initial market reaction may have been overdone.
While there may be some near-term consolidation in Japanese equities, we remain constructive on the market, particularly due to the return of reflation to Japan and continued corporate governance reform.
The powerful trend of improving corporate governance and shareholder returns is also a source of investment opportunity.
We have recently seen large buybacks across many sectors, including some ultra conservative companies, which should be seen as a sign of change and progress.
Also, the biggest opportunity in Japan remains at the stock level, driven by several structural changes which create investment opportunities in areas such as digital innovation, automation, demographic changes, medical technology development and higher use of renewable energy.
We believe that all these trends will continue regardless of the broader economic backdrop.
Junichi Inoue, head of Japanese equities and portfolio manager
Janus Henderson
Despite record corporate profits and a peak Nikkei index, the Kishida administration's approval ratings have struggled, primarily due to initial expectations of a shift from Abenomics, concerns over tax increases, and falling real wages amidst inflation.
The administration's early tax increase proposal was quickly withdrawn, and while a one-time tax cut was implemented, damage to its image persisted.
Efforts to raise wages and introduce tax incentives have yielded results, especially in urban areas, but have not offset the impact of inflation on disposable income in regional areas and among pensioners.
Only recently have real wages started to show an increase, but the timing has affected the administration's popularity.
Kishida's resignation, driven by the need for a new party leader before the next election, positioned Ishiba, popular in rural areas, as a favourable choice to improve party approval.
The economic policies of the Kishida administration, now showing positive signs, are expected to continue, with the Bank of Japan's monetary policy aiming for a stable 2% CPI increase.
The change in prime minister is anticipated to have a limited effect on the equity market and currency exchange rates, reflecting a continuity in economic direction.
Daniel Hurley, global equities portfolio specialist
T. Rowe Price
On balance, we view the election result as neutral, or less negative than feared.
We believe governance reform can continue to make progress in Japan, despite it not being a key policy for new Prime Minister Shigeru Ishiba.
However, he is likely to follow similar policies of the most recent Prime Minister Fumio Kishida, suggesting some support for reforms may stay in place.
Valuations of Japanese stocks remain compelling.
At the market level, the TOPIX is trading on a price-to-earnings (one year forward) of 14.5x, in line with the long term average, and earnings growth expectations are steady at 6-8%.
The medium to long-term outlook remains positive and our focus on identifying the best bottom-up investment opportunities is well-placed to perform in this environment.
Ishiba’s views are considered slightly hawkish on monetary policy. He has previously noted the need to assess the cost/benefit of easing during the Abenomics regime and the need to curb the recent increase in inflation.
Ishiba is unlikely to exert much influence on the Bank of Japan and the focus should remain on wage growth and measures of sustainable inflation, which have slowed recently below the 2% target.
Our fixed income team believes a 25 basis point rate hike in the first quarter of 2025 is still the base case, despite the consensus being December 2024.
Mario Montagnani, senior investment strategist
Vontobel
We believe the policy agenda of Japan’s incoming prime minister Shigeru Ishiba could have a varied impact on Japanese stock markets as well as on the yen's carry trade.
We think his emphasis on structural reforms - particularly rural revitalisation - is not in line with the pro-growth "Abenomics" approach that has supported Japanese stock market prices in the past years.
Indeed, Ishiba has in the past loudly criticised the Bank of Japan's aggressive monetary easing.
As a result, we think investors may become more cautious in the face of this shift in Japan's political landscape.
This could lead to potential volatility, if not even, to a potential market correction in the short term, particularly if expectations of aggressive monetary stimulus should wane.
It is important to note that Ishiba himself recently downplayed speculations on this issue.
In fact, over the weekend he stressed that Japanese monetary policy is expected to remain accommodative, which in a sense implies a willingness to keep the cost of borrowing low to bolster a still fragile economic growth.
On the other hand, Ishiba's potential shift toward a more normalised monetary policy might consider the possibility of rate hikes, which we think is likely to strengthen the yen.
This could dampen the appeal of the “yen carry trade” - a strategy in which investors borrow yen to invest in higher-yielding asset classes.
As such, a stronger yen would reduce the profitability of this strategy, and traders might begin to dispose of short yen positions. We had a taste of this during the past month of August.
Finally, a stronger yen could hurt the export activities to which Japan is structurally tied.
Hisashi Arakawa, deputy head of investment management, Japan
abrdn
While investor concerns about the potential for higher taxes on investment income and "re-distribution" may weigh on the market in the near term, we anticipate that investor attention will gradually shift to his policies.
Ishiba is supportive of the Bank of Japan's path to monetary normalisation and has emphasised his intention to lead a complete exit from deflation.
We expect continuity in monetary and economic policies under Ishiba, who is poised to drive Japan’s efforts to return to a "virtuous cycle between wages and prices," which would positively impact the domestic economy.
Ishiba's additional policies, such as increased reliance on renewable energy, reshoring of production, and labour market reforms, bode well for some Japanese companies.
Tomo Kinoshita, global market strategist, Japan
Invesco
I think Ishida’s policy likely will not impact Japan’s stock market very much.
Japan is currently going through a structural transformation under which a tight labour market leads to a rise in wages and then a rise in domestic demand in a sustained way.
These factors potentially contribute to a moderate rise in equity prices.
The market is concerned about some risks for Ishiba’s inauguration, including the possible imposition of a new tax on financial income and his ability to implement this policy stably.
However, I think these two risks are unlikely to materialise.
Ishiba made it clear that he will continue to promote domestic household investments in financial products.
Also, he has the ability to implement his economic policy, because the expected victory in the coming general election this month should enable him to obtain political capital.
On the carry trade, it is likely to lose momentum as the Bank of Japan is expected to raise policy rates multiple times in the coming quarters, which would make the carry trade more costly.
Martin Hennecke, head of Asia investment advisory
St. James’s Place Asia
As attention has recently shifted significantly back to China following last month’s stimulus roll-out, we feel good opportunities in Japan that can provide sound portfolio diversification are being overlooked again, particularly with the US still being relatively higher priced.
Ishiba’s apparent low interest/weak yen policy may lend support, as Japanese investors, wary of rising inflationary risk eating into the purchasing power of deposits with negative real interest rates, may increasingly allocate to equities for wealth preservation.
Ultimately though, we strongly believe that the quality of individual companies and careful consideration of their fundamentals are most important for the investment selection process.
These are what would tend to do well through different leadership and economic cycles.
With regards to the yen carry-trade, I would note that we advise strongly against the use of speculative leverage as it can backfire badly during adverse scenarios which nobody can rule out to be possible at times, often unexpectedly so.
The use of such leverage may force speculators out of positions during crisis times at unfavorable prices as a result of margin calls or losing their nerves.
While the low interest having to be paid on yen loans might seem like a no-brainer to some as a tool to enhance investment returns, it is exactly those ‘low-cost’ currencies that tend to rise most sharply in such scenarios as well.
Aninda Mitra, head of Asia macro and investment strategy
BNY Advisors Investment Institute
Ishiba’s appointment as the new prime minister is seen as ushering in overall policy hawkishness, but sequencing and calibration will be key.
Further Bank of Japan (BOJ) policy normalisation is not necessarily a bad thing insofar as Japan’s economy manages to sustain around 3% nominal GDP growth, with inflation around 2% - in line with the BOJ’s own medium-term projections.
Greater normalisation of monetary policy settings could weed out zombie firms and may complement a pick-up in productivity.
It will also provide the BOJ with greater policy flexibility should future adverse events warrant renewed monetary easing.
We think this could be a bumpy road for equity investors as narrowing interest rate differentials will also strengthen the Japanese yen (versus the US dollar) and weaken a key tailwind for corporate earnings, especially at globally dispersed Japanese companies.
This is precisely why we took our tactical asset allocation recommendation to ‘neutral’ from ‘favourable’- back in June this year, when we anticipated that BOJ normalisation was about to kick off.
This risk then raises the question of ‘policy sequencing’ – can Japanese companies also bear a tax hike?
Fiscal and debt sustainability concerns may be important motivating factors for proposed tax hikes.
But placing growth dynamics (and corporate earnings) on a sustainable footing should, in our view, be accorded a higher priority over the near-term.