“Kono in charge will see the Nikkei hit 40,000.”
That’s the typically fearless prediction of long-time Japan analyst Jesper Koll. With Japanese stocks recently hitting bubble-era highs, the market already appears to have decided on the outcome of the September 29 Liberal Democratic Party (LDP) presidential poll.
Due to the ruling coalition’s control of Japan’s parliament, the winner will almost certainly become leader of the world’s third-largest economy.
On September 14, the benchmark Nikkei Stock Average hit its highest level in 31 years, closing at 30,670, amid increased confidence in the ruling coalition’s political longevity and hopes the next leader will unleash further fiscal stimulus.
Tokyo-based Koll sees financial markets voting with their wallets in backing Kono Taro, minister in charge of administrative and regulatory reform, ahead of rival candidates Kishida Fumio (former foreign minister and LDP policy research council chairperson), Takaichi Sanae (former internal affairs and communications minister), and Noda Seiko (LDP executive acting secretary general).
“Financial markets above all want stability. You’ve got the lower house election in November and the upper house election next July, and the question is, who can excite Mr. and Mrs. Watanabe to vote and ensure the LDP maintains its super-majority?” said Koll, expert director at Monex Group Japan.
“If this was a presidential race, a beauty contest amongst the people, there’s no question that Kono would be the winner – he’s charming, attractive, and media-savvy compared to his rivals.
“So from the market’s perspective, Kono most likely will provide stable government by maintaining the LDP’s control of parliament. And secondly, the markets also want someone who actually listens to them, not just the bureaucrats, and here again Kono is the most likely ticket.”
Currently leading Japan’s COVID-19 vaccination drive, the 58-year-old Kono is known for his reform-minded views and social media savvy, with some 2.4 million Twitter followers. A graduate of Georgetown University, the English-speaking Kono has lived and worked in both the United States and Singapore, also serving previously as Japan’s foreign and defense minister.
However, he has faced criticism for his direct, no-nonsense style, including snapping at bureaucrats or making abrupt decisions, such as cancelling the Aegis Ashore missile defense system.
In economic policy, Kono is known for his zest for reform, such as virtually eliminating the use of hanko (personal seals) in administrative processes in his digitalization drive. Similar to other candidates, he has pledged a fiscal stimulus package to fight the coronavirus pandemic, although in energy policy, he has toned down previous criticism of nuclear power, calling for a “realistic energy policy” that also boosts renewables.
In contrast, 64-year-old Kishida, who was Japan’s longest-serving foreign minister, is considered the “establishment” candidate. Kishida has also pledged a massive fiscal stimulus, albeit still aiming to maintain the primary balance target for fiscal 2025.
However, he has pledged to move away from the deregulatory reforms pushed under “Abenomics,” vowing to close widening income gaps and seek a “new model” for Japanese capitalism.
Vying to become Japan’s first female prime minister is 60-year-old Takaichi, who is seen as a nationalist protégé of former Prime Minister Abe Shinzo.
On economic policy, she has called for aggressive fiscal spending and monetary stimulus to achieve 2 percent inflation, as well as promoting “bold investments” in growth sectors. She has also called for an “economic security law” that would restrict foreign access to Japanese technology.
A late entrant to the race, 61-year-old Noda contrasts with her female rival due to her more liberal views, including on women’s empowerment. A former minister for internal affairs and communications as well as gender equality, she has pledged to create a country more diverse and friendly to the weak.
However, the latest opinion polls suggest the race is between Kono and Kishida.
A survey of LDP rank and file members put Kono in front with 41 percent, well ahead of Kishida on 22 percent, Takaichi at 20 percent, and Noda at just 6 percent, the Yomiuri Shimbun newspaper reported on September 20.
However, a separate survey of LDP lawmakers put Kishida in front, ahead of Kono, Takaichi, and Noda.
With the LDP poll to include 382 votes from LDP lawmakers (Diet members) and 382 votes from rank and file members, the results indicate that “there will be no clear winner after the first round of voting, likely leading to a runoff between the top two finishers,” the report concluded.
Another survey of LDP rank and file members by Kyodo News found similar results, with Kono well ahead of Kishida, followed by Takaichi and Noda.
The poll also found that Japan’s next prime minister should focus firstly on countering the coronavirus pandemic (26.8 percent), followed by the economy (24.2 percent), and foreign and security policies (19.4 percent).
Old vs. New
With Kono apparently headed for victory, what might a new administration mean for Japan’s COVID-19-hit economy?
“In terms of basic settings, such as monetary and fiscal policy, there’s not really going to be much difference. The big difference is in terms of deregulation, of focusing on the start-up community, on technology and allowing technology to create new companies,” Koll said.
“Under Kono, Japan can become a start-up nation, while with Kishida, there will be support for ‘zombie’ firms, protecting the old rather than creating the new.”
He added: “And with Takaichi, the role of the state will be expanded. She wants to set up a new ministry of national security, so there will be an even more stringent regime of national security control over industrial development and entrepreneurship.”
Koll hopes Kono can spur “generational change” within the LDP leadership, including appointing outsiders to key cabinet posts, as well as installing new talent on the various government advisory bodies.
In contrast, Koll sees a Kishida victory resulting in another “short-term” leader, with the next cabinet to reflect LDP seniority more than merit.
In the short term though, the newly anointed leader’s most pressing issue remains the coronavirus pandemic.
John Vail, chief global strategist at Nikko Asset Management, sees the impact of the virus as being “more important than what happens with the election, and new cases are falling rapidly.”
“The second key point is the LDP is likely to do very well in this election, regardless of who is prime minister. By the time the election happens in November, the economy will have rebounded and virus cases should have fallen sharply so they’ll loosen social restrictions, which will make the voters happy,” said Tokyo-based Vail.
“There will likely be more women in the new cabinet formed by the LDP leader and that will increase the party’s attractiveness in the Diet election. And there will be some movement toward reform that people will like, regardless of who is in charge.”
As to who might win the LDP poll, Vail expects a close race between Kono and Kishida.
“Kono is a bit more reform minded, but what he is proposing right now is not anything too radical. He’s aware that he’ll have to work within the system, so no one should expect any major short term developments or reforms if he becomes prime minister, but there will be at least more optimism about more change,” he said.
“Kishida has promised a lot of fiscal stimulus, but I’m not sure whether he’ll feel that’s necessary if he becomes prime minister as the economy will be improving quite a bit.”
Vail said any potential change in the consumption tax or corporate tax rates would be watched closely by markets. He also warned of the risk of increased tensions between Japan and China, although noting that “Japan has been very successful in balancing geopolitical tensions between China and the U.S., with both sides wanting to keep Japan close.”
Capital Economics expects the winner of the LDP race to benefit from falling cases of the Delta variant, together with the rising vaccination rate.
“Whoever wins should be able to lift domestic restrictions and ride a strong recovery in Q4 [the fourth quarter],” Japan economist Tom Learmouth said in a September 20 report.
“Ex-PM Abe’s long-term rival Ishiba [Shigeru] has criticized Abenomics for favoring corporate profits over wages, and Kono appears to have absorbed some of his new supporter’s thinking in demanding this week that ‘we must shift our focus toward boosting household income, from corporate profits,’” Learmouth noted.
“Kono has suggested a lower corporate tax rate for firms that distribute a high share of their income to their workers. And like all the other candidates, Kono has pledged to compile a stimulus package – to focus on renewable energy and 5G – which would provide another tailwind to the recovery over the coming months. We expect output to return to pre-virus levels in Q4 and to return to near its pre-virus path around the middle of next year.”
Reform and Roadblocks
After pledges by outgoing Prime Minister Suga Yoshihide to drive microeconomic reform ran into roadblocks, his successor will face the same challenge of overcoming bureaucratic and vested interests to raise productivity amid rising debt levels, an aging population, and geopolitical and other economic threats.
Japan’s fiscal hawks will also pressure the new leader to commit to another hike in the consumption tax rate, a move that has previously sparked recession.
In monetary policy, the new leader will also play a role in Bank of Japan policy, being required to select a successor to the current governor, Kuroda Haruhiko, whose term in office expires in April 2023.
Given Kuroda’s ultra-easy money approach, the appointment of any governor seen less committed to monetary expansion could trouble markets, as would any sign of an early “taper” to bond buying by the central bank.
The International Monetary Fund (IMF) has praised Abenomics for easing financial conditions, reducing the fiscal deficit, and improving employment and female labor force participation. Nevertheless, the IMF warned in February 2020 that structural reforms had been slow to progress, with bottlenecks remaining in the labor, product, and service markets, exacerbated by demographic trends that project the population shrinking by over a quarter by 2065.
In the latest OECD “Economic Outlook,” the Paris-based economic organization predicts Japan will bounce back from negative 4.6 percent GDP growth in 2020 to a 2.5 percent rise this year, cooling slightly to 2.1 percent in 2022.
However, with employment still lower than its pre-pandemic level and core consumer price inflation falling into negative territory, the nation is yet to stage a full recovery from the coronavirus.
Should Kono win the race, he can hardly claim to be unprepared. An eight-term lower house member, Kono was born into a family of politicians, with his grandfather Ichiro having served as deputy prime minister and his father Yohei as LDP president.
Yet regardless of the outcome of the LDP race, the party that has ruled Japan for most of the postwar period will be making a generational shift. Success for Kono, Takaichi, or Noda would give the nation its first prime minister born after 1960, while Kishida would only be the second born after the LDP’s establishment in 1955.
The election of Japan’s first female prime minister would also mark a major shift forward for a nation that has long ranked low on gender equality.
Can the new generation succeed where the old guard failed? Time is against the LDP, with the new leader only having a few short weeks to convince voters of their merits. And for once, health and not the economy will likely dominate the campaign.