Japan Strategists Size Up Leadership Candidates on Market Impact

Mari Kiyohara
·3-min read

(Bloomberg) -- Japan’s ruling Liberal Democratic Party will select a new leader next month in an election that may sway defense stocks, bolster shares of ride-sharing services and help determine the trajectory of the yen.

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While some analysts warn it’s too early to trade off of candidates’ policies as there’s no clear front-runner, strategists say a desire for the central bank to normalize policy is shared by at least three contenders — former Defense Minister Shigeru Ishiba, Digital Minister Taro Kono and LDP Secretary-General Toshimitsu Motegi. Economic Security Minister Sanae Takaichi is seen as dovish.

A hawkish stance is widely expected to lead to rising interest rates and a stronger yen, which could weigh on stocks.

Other possible contenders include LDP lawmaker Takayuki Kobayashi, Foreign Minister Yoko Kamikawa and Shinjiro Koizumi, son of former premier Junichiro.

Here’s what analysts had to say about the potential market impact:

Japanese Stocks

Nomura Research Institute (Takahide Kiuchi)

  • Motegi has emphasized deregulation, advocating for the full legalization of ride-sharing in Japan and urging government to relax regulations. Similarly, Koizumi also prioritizes deregulation

    • NOTE: Ride-share stocks including Daiwa Motor Transportation Co., a taxi company that has explored ways of utilizing the service, and Adish Co., which provides information technology, jumped last October on a report that Prime Minister Fumio Kishida is considering allowing the service

  • If Takaichi, known for her conservative stance and support for aggressive fiscal policies, is chosen, it could signal a significant shift from the policies of the Kishida administration

Barclays Securities Japan Ltd. (Naohiko Baba, Ryuichiro Hashimoto)

  • Ishiba, Kono and Motegi are generally seen as hawkish on monetary policy, which could strengthen the yen and lower stock prices

  • If Takaichi wins, the opposite outcome is expected

Mizuho Securities Co. (Masatoshi Kikuchi)

  • There are concerns that if someone like Ishiba, who prioritizes social welfare and regional revitalization, takes over from Kishida, the market-friendly policies like the new tax-free investment account called NISA could be scaled back

Nli Research Institute (Tsuyoshi Ueno)

  • Kono is perceived as a proponent of deregulation, which could lead to improved productivity and a subsequent rise in stock prices

    • While recent hawkish comments from Kono have led to rising rates and a stronger yen, the potential for deregulation-driven market gains should not be overlooked

Ortus Advisors Pte (Andrew Jackson)

  • Kono would be positive for defense-related names given he was minister of defense during the Abe administration

  • NOTE: Defense-related shares include Kawasaki Heavy Industries Ltd., Mitsubishi Heavy Industries Ltd. and IHI Corp.

The Yen

MUFG Bank Ltd. (Teppei Ino)

  • Kono, Motegi and Ishiba have made direct statements on monetary policy, suggesting they are likely to support normalization efforts

    • The narrowing of domestic and international rate differentials due to policy normalization could help strengthen the yen

  • Takaichi may be part of the reflationary camp, which could lead to a weaker yen if normalization does not progress

  • Both Takaichi and Kobayashi are likely to follow in Kishida’s footsteps to some extent

    • This could lead to the further promotion of inward direct investment

Sumitomo Mitsui Trust Bank Ltd. (Ayako Sera)

  • If a very young leader like Kobayashi or Koizumi were appointed, it could be seen as a factor that encourages yen buying from an international perspective

Japan’s Bonds

Sumitomo Mitsui DS Asset Management (Sohei Takeuchi)

  • Senior members of the party and the current administration, including Motegi and Kono stated that interest rates should be raised prior to the July BOJ policy meeting

  • Takaichi is expected to continue the reflationary path, making it more challenging for the BOJ to raise rates

Mitsubishi UFJ Morgan Stanley Securities (Keisuke Tsuruta)

  • At this stage, there is significant uncertainty regarding what a new prime minister’s economic policies would be and the schedule for a potential dissolution of the House of Representatives

    • That makes it difficult for the market to fully factor in a rate hike by the BOJ

--With assistance from Yasutaka Tamura, Daisuke Sakai, Hidenori Yamanaka, Masahiro Hidaka, Mia Glass and Momoka Yokoyama.

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