News that Yoshihide Suga would not seek re-election as leader of ruling Liberal Democratic Party’s (LDP) president on 3 September proved to be the catalyst behind a rally that took benchmark Nikkei 225 index to hit highs not seen in over 30 years.
That run was in stark contrast to the previous 12 months of Suga’s leadership which saw the Nikkei 225 index rise 19%. In comparison, global peers were powering forward through a bull run which saw US benchmark S&P 500 index and South Korea’s KOSPI gaining over 33% in the same period.
That recent run has faltered, but what impact will Fumio Kishida, his successor, have on the Japanese equity market?
What next for Japanese equities?
Not much is the analysis of Goldman Sachs’ economist Naohiko Baba. He wrote in a report for the US bank that the middle of the road Kishida is unlikely to be a catalyst for major change.
“Kishida is likely to generate the weakest equity market moves” of the candidates, “particularly since his reformist views appear somewhat weak and his stance on fiscal discipline is cautious.”
Instead the recent Japan equity market bull run is in part a reflection of just how unpopular Suga had become as Japanese premier.
Nomura negative in the short term
A Nikkei/TV Tokyo poll showed public support for Suga was the worst for a Japanese leader in nine years. There was a growing consensus among political experts and party insiders that the ruling LDP party had better chances of retaining power with a new leader in place.
For the short term, Yunosuke Ikeda, research analyst at Nomura, thinks Kishida’s win will be negative for share prices.
“Kishida had fewer votes from party members and affiliates in the first round of voting than his run-off rival Taro Kono (110 versus 169), which casts some doubt over whether he can boost the party’s approval rating ahead of the Lower House election; and his policy stance has been to emphasize the redistribution of income and has not shown much commitment to structural reforms.”
UBS is more bullish
Despite this Nomura is still predicting a year-end Nikkei 225 forecast of 32,000 - above its current level.
Analysts at UBS Global Wealth Management Chief Investment Office, the high net worth advisory arm of the Swiss bank, are more bullish about the new prime minister.
Suga’s last actions as prime minister was to lift the state of emergencies in Tokyo and 18 other prefectures, which had weighed on equity market performance over the past months.
Kishida backs fiscal stimulus
UBS Global Wealth Management Chief Investment Office said in its fourth quarter market outlook that a shift in leadership in Japan could mean further fiscal stimulus thereby creating a “supportive fundamental backdrop” for equities.
And this appears to be what Kishida is planning. In his election campaign the incoming LDP leader said that the Bank of Japan must maintain its massive fiscal stimulus to help the Japanese economy recover from the effects of the ongoing pandemic.
“In addition, economic measures on the scale of tens of trillions of yen must be firmly established by the end of the year,” Kisihida said after his victory at the LDP election on Wednesday.
Strong corporate earnings expected
Despite the recent upswing in Japanese equity markets, UBS thinks there is more upside potential particularly with a strong corporate earning season ahead.
“Japan’s earnings strength hasn’t been priced in,” UBS said. “We forecast corporate earnings growth of 42% for the fiscal year ending March 2022, which is in line with our global forecast; with the Japanese market (MSCI Japan) trading at a 14% discount versus the global index (MSCI ACWI) on a 12-month forward PE (price earnings) basis.”
This view was backed Shingo Ide, chief equity strategist at Japan’s NLI Research Institute.
"We are expecting to see an upbeat market under the new administration throughout the year as a trend for healthy earnings reports from domestic companies will likely continue," he told Kyodo News.
Export-led growth ahead
UBS added that export-focused revenues of most Japanese companies are well positioned “to win from this period of high global growth”. Plus, given the scenario of an eventual hike in US interest rates, “Japanese stocks tend to be more resilient to rising US real rates than other equity markets,” UBS said.
This positive view was reflected by JP Morgan analysts who said that while Japan has underperformed the US since the start of the pandemic as the economy reopens, markets should also improve.
“The government is also expected to keep the foot on the fiscal stimulus gas pedal, especially around the time of the Lower House general elections.
Most importantly, the global recovery should support the expansion of the global corporate capex (capital expenditure) cycle, which traditionally has a strong correlation with Japanese corporate earnings,” said Tai Hui, Global Market Strategist at the US bank.