‘Kishida Shock’ on Equities Shows Fears that Japan Slips on Reforms

TOKYO – The Japanese stock market suffered an eight-day streak of uninterrupted defeats with the election of a new prime minister, an event that usually produces a rally, in what some have dubbed the “Kishida shock”.

The Nikkei Stock Average has fallen 6.8% since Fumio Kishida won the ruling Liberal Democratic Party leadership race on September 29. About 80% of the benchmark’s gains since August have been wiped out.

Kishida, who became Japan’s 100th prime minister on Monday, put international investors in the mood to sell, according to a New York-based hedge fund manager. They fear that market-oriented corporate governance reforms and structural changes in the country’s economy will slow down or even revert to the “bad old days” of pre-1990s Japanese industrial policy, said declared this person.

Fueling this anxiety is Kishida’s stated goal of a “virtuous cycle of growth and distribution.”

“The meetings I had with foreign investors last week were downright difficult,” said a strategist at a Japanese brokerage firm. “They ask me how Japan can achieve growth, because growth is necessary for distribution, and I cannot give them a definitive answer.”

In a note to investors on Wednesday, a Japanese equity manager at an international brokerage firm tore up Kishida’s earnings doubling plan, whose name is reminiscent of the high-growth economic policies of then Prime Minister Hayato Ikeda, in the early 1960s.

“Perhaps this is just a meaningless call for a ‘better time’, cynically aimed at elderly voters – but it’s also a rather disturbing suggestion to anyone who imagines that Japan has yet to extricate itself from its legacy remnants of the “state capitalism” under the leadership of powerful bureaucracies, “the note reads.

After hitting a year-to-date low in August, the Nikkei average rebounded sharply to a 31-year high on September 14, shortly after unpopular former prime minister Yoshihide Suga announced that ‘he would withdraw. Investors anticipated a changing of the guard in Tokyo with the race to succeed him as head of the LDP, but the political rally fizzled out.

Of course, the liquidation also reflects uncertainties beyond Japan, such as the debt crisis of the China Evergrande group and the rise in long-term interest rates in the United States. also a determining factor.

That said, the Dow Jones Industrial Average rose 0.04% between September 28 and Tuesday. The MSCI World Index lost only 0.5% over the same period. This shows that international factors cannot fully explain the sharp losses in the Nikkei average.

One of the possible reasons Kishida inspired such rapid disappointment is his stance on taxing financial income. The new Prime Minister said Monday at his first press conference that the taxation of capital gains and dividends was “an option” to carry out his policy of growth and distribution.

“Biden administration calls for capital gains tax expansion, and there is a global trend for higher taxation of the rich to correct disparities,” said analyst at major brokerage Japanese. “But it is questionable whether the time has come to push forward such a policy in Japan, where the disparities are comparatively smaller.”

Some market watchers see the financial tax debate in Japan as stemming from an outdated view of stocks as a hobby for the rich.

“What Japan needs the most right now is to promote financial inclusion, in which people from all walks of life can enjoy the benefits of investments,” said Hideto Fujino, president of Rheos Capital Works at Tokyo.

But while retail investors may complain about a financial tax, the proposal does not appear to have taken into account the massive sell-off among international investors. Clues to their thinking can be seen by looking at the performance of Japanese stocks under prime ministers dating back to 2000.

Nomura Securities compared the large TOPIX stock index to the MSCI World Index to calculate a Japanese stock premium. External and macroeconomic factors, such as the dollar-yen exchange rate, have been eliminated in order to determine the true impact of successive Japanese governments on the stock market.

Of the 10 governments since 2000, the one headed by Prime Minister Junichiro Koizumi from 2001 to 2006 chaired the biggest bump. Under Koizumi, whose iconic structural reform was to privatize the postal savings system that financed inefficient public spending, the premium rose from deep into negative territory to reach the highest levels in the two-decade period.

Junichiro Koizumi bids farewell to the staff of his official residence as he leaves Japan as Prime Minister in September 2006. © Reuters

Pages of the Nikkei newspaper in Japanese since 2000 confirm Koizumi’s association with structural reforms. A greater proportion of Nikkei articles containing this phrase appeared during Koizumi’s tenure than during that of any other prime minister.

The bonus generated by Shinzo Abe’s second term as Prime Minister from 2012 to 2020 was small in comparison.

“The equity gains under Abe’s government can be almost entirely explained by the effects of the weaker yen,” said Yunosuke Ikeda, chief equity strategist at Nomura Securities. “Just as the growth strategy was a dud among the three arrows of the Abenomics, all other factors that drove the stock price growth were minor.”

“International investors valued [Koizumi’s] stance in favor of structural reforms, and that value judgment lifted Japanese stocks, ”Ikeda said.

For some, Kishida’s government represents a turning point in the neoliberal agenda that has prevailed since the Koizumi era in Japan.

Increasing efficiency through structural reforms is the only way to achieve growth in a country with a shrinking population, says the New York hedge fund manager, who fears Kishida could halt the surge.

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