In the Upper House election held on July 10, the ruling party coalition won 76 seats and the Liberal Democratic Party (LDP) won 63 seats, the majority of the contested seats, out of 125 seats up for election.* It was a big win for the LDP. Our Japan Fund Manager, Wee Ban Yew, highlights 4 key points from the election outcome and his views on the market.
*Source: The Japan Times, “Sweeping LDP Upper House victory heralds fresh start for Kishida”, 10 July 2022
1. Solid outcome for Liberal Democratic Party (LDP), which who maintained majority of both Lower and Upper Houses. With the demise of ex-Prime Minster (PM) Shinzo Abe, the largest faction within LDP is now without a leader. There will be some uncertainty regarding this, but for the short-term, it could mean Prime Minster (PM) Fumio Kishida can now push for his own policies first. While Kishida started off being a little anti-stock market by talking about taxes on financial income, he has shifted gear towards more pro-market policies like income-doubling through personal investments. Otherwise, his policies are generally pro-growth.
2. The stock market generally reacts positively to a large LDP win (refer to Figure 1 below). This time, LDP will have 3 years to push forward policies as the next major election is in 2025. One of the major changes could be the restart of nuclear power plants that were idled after the Tohoku earthquake. This has become important with the Ukraine war curbing Russia oil and gas imports and the spike in energy costs. Another potential change could be the pacifist constitution. In terms of pro-constitution change parties, they make up 2/3 of both chambers, but it is still unknown if PM Kishida will push for constitution change since this was Abe’s project, but not Kishida’s.
Figure 1: Election results and stock price performance in past Upper House elections
In past Upper House elections, stock price performance was positive/neutral unless the LDP suffered a major defeat
Source: J.P. Morgan, Japan Equity Strategy, 11 July 2022
3. The next market focus could be the Bank of Japan (BOJ)’s next governor. The current governor was appointed by Abe and has pursued ultra-easy monetary policies. His tenure ends in Apr 2023. The next governor will be chosen by Kishida and the candidate chosen could indicate the future of BOJ policies.
4. In general, politics is not the primary driving factor for stock market in Japan when LDP is in power because LDP leadership works on consensus and in tandem with corporates. That said, Abe has done a lot for investors in Japan. He appointed a pro-market BOJ governor, shifted Government Pension Investment Fund (GDIF) investment policy to increase the weight in stocks, and introduced stewardship and governance codes for both investors and corporates to pay more attention to shareholders’ rights. Investors had benefitted from Abenomics in Japan.