By Kei Okamura
Two key events have rocked Japan: the assassination of former Prime Minister Shinzo Abe and the landslide victory of the ruling coalition.
What a difference a few days make. The assassination of Japan's longest-serving former prime minister shocked the nation and markets, pushing up the yen and sending stocks lower, before their recovery by market close the same day. Although Shinzo Abe resigned two years ago, he continued to wield influence on Japanese politics as the chief of the ruling Liberal Democratic Party's biggest political faction.
To illustrate, current Prime Minister Fumio Kishida announced his draft economic strategy early this year, but the final version omitted a commitment to balance Japan's national budget after meeting fierce opposition from Abe and his allies, who favored aggressive national spending to prime the economy. The general elections that took place just two days after Abe's death saw the ruling coalition expand its dominance of the upper house. It could be suggested that some of those winning votes reflected public sympathy toward the late former premier.
Many believe that, in the near term, Kishida will not dial back on fiscal stimulus and monetary easing - the first two arrows of "Abenomics." He's pledged an economic package to combat rising prices and suggested more stimulus is on the way going into 2023. In the meantime, we expect the government to continue supporting the Bank of Japan's decision to maintain quantitative easing, despite the depreciating currency.
The changed balance of power will likely, over time, allow Kishida to solidify leadership within the party and implement policies envisioned under the "New Capitalism" plan, which focuses on human capital investment, supporting start-ups and pushing efforts to decarbonize and digitalize the economy. We believe this has the potential to help Japan achieve more sustainable growth in the long term.
Kishida has both the public and time on his side, as his public approval remains among the highest on record while the next election is three years away. Although far from a done deal, prospects of constitutional reform have increased as the ruling coalition and like-minded allies now control the majority of both houses of Parliament.
The Bank of Japan is scheduled to appoint a new governor in April 2023. While we don't expect any immediate changes, over time we anticipate that some of the unique initiatives, such as yield-curve control, will be reviewed.
Recent days have been a rollercoaster for Japan, but we believe this remains a market of great potential for long-term investors.
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