When Tokyo’s markets open on Monday, participants will grapple with two questions that have not bothered them for almost eight years: how a new Japanese prime minister will affect asset prices and how much of the “Abenomics” edifice will survive the sudden departure of its architect.
The last 45 minutes of trading on Friday, which played out against media reports trailing Shinzo Abe’s resignation later that day, gave a flavour of the ructions that may come after the departure of the country’s longest-serving premier.
The Topix index fell by more than 1.5 per cent and the yen — which often strengthens during times of turmoil — began a surge against the dollar that would take it from ¥106.8 to ¥105.6 in a few hours.
In the short term, predicted SuMi Trust’s senior economist Naoya Oshikubo, sentiment will probably stay fragile, as markets speculate on Mr Abe’s successor and absorb the departure of a leader who, more explicitly than many of his predecessors, entwined his political ambitions with performance of financial markets.
In late 2013, Mr Abe famously stood on the floor of the New York Stock Exchange and urged investors to “buy my Abenomics”. The plea was met with a record ¥25tn net influx of foreign investment between December 2012 and June 2015, according to analysts at CLSA. December 2012 marked Mr Abe’s election on a platform of monetary, fiscal and structural stimulus to boost the deflation-prone economy.
Much of that foreign money ebbed away in the second half of Mr Abe’s stint in charge, as global investors lost faith after what they saw as mis-steps — including two increases in the rate of consumption tax that hit the economy hard.
Even so, analysts pay tribute to a number of market-friendly reforms on his watch, including the introduction of Japan’s first stewardship and governance codes and allowing shareholder activists a freer rein to challenge often-intransigent management.
The rewards for investors under his tenure have been tangible. The Topix index returned 85 per cent in dollar terms, including dividends, since Mr Abe came to power almost eight years ago, underperforming the S&P 500 in the US but significantly outperforming both the MSCI Europe and MSCI Emerging Market indices. Since Mr Abe’s election, noted Jefferies strategist Shrikant Kale, the dividends of Japanese companies have doubled and buybacks have quadrupled to a record ¥22tn.
Mr Abe’s rule also coincided with an extended period of yen weakness that broadly benefited corporate Japan by pushing up profits. CLSA strategist Nicholas Smith suspects that currency markets will soon test his successor’s resolve to limit gains.
Tai Hui, chief Asia market strategist at JPMorgan Asset Management, said that investors may focus on the risk that Japan reverts to its previous mode of frequent changes of prime minister. He noted that not all potential successors within the Liberal Democratic party are in favour of the kind of aggressive monetary policy — including huge purchases of government bonds and exchange traded funds, on top of ultra-low interest rates — that has characterised Mr Abe’s era.
Mr Oshikubo of SuMi Trust said that the formal end of Abenomics could cause stocks to fall a further 6 per cent in coming weeks, before an LDP leadership election around the middle of September.
But beyond that, he added, the market is likely to realise that the LDP, which holds a large majority in parliament, is primed to follow many of the policies pursued by the Abe administration. Kiichi Murashima, Japan economist at Citigroup, said that if — as many expect — Mr Abe is replaced by his chief cabinet secretary, Yoshihide Suga, the party may even lean towards an “Abenomics 2.0”. “For better or worse, the continuity of economic policies will probably be maintained,” he said.
Naoki Fujiwara, a fund manager at Shinkin Asset Management, noted that a change at the top of government will make no immediate difference to the tenure of Haruhiko Kuroda, the governor of the Bank of Japan, and master of its protracted easing policies.
In a note on Friday, Morgan Stanley’s Asia strategist Jonathan Garner wrote that Mr Abe’s achievements were “similar in scale to that of the transformational leaders of the 1980s — Ronald Reagan and Margaret Thatcher — and equally unlikely to be reversed.”