The positive developments in Japan’s economy and business environment, which have helped attract large amounts of investment over the past two years, could be undermined by the political turmoil resulting from Sunday’s parliamentary elections.
Although Japan’s economy is not experiencing dramatic growth, it is gradually recovering from the turmoil caused by the coronavirus pandemic. The arrival of long-awaited inflation has given the Bank of Japan room to raise interest rates for the first time in nearly 20 years.
Warren Buffett’s move last year to increase his holdings in Japan’s largest trading companies has prompted investors to move money from China, which faces economic and geopolitical risks, to Japan. Japan’s corporate profits have remained strong, and government-led changes, such as guidelines encouraging serious consideration of takeover proposals, are prompting companies to take steps to strengthen their appeal to investors. There is.
Japanese stock prices have experienced one of the strongest gains in recent decades. The benchmark Nikkei 225 index is up nearly 50% since the beginning of 2023.
Currently, the Liberal Democratic Party, the party that has ruled Japan for all but four years since 1955, has lost its majority in the powerful House of Representatives, leaving the future government structure and economic policy direction uncertain.
“The reason why Warren Buffett and others were excited about Japan is not lost, but it needs to be in the context of a stable macro environment,” said Jesper Cole, a director at financial services firm Monex Group. “For now, the bulwark of stability that has made Japan so attractive will fail.”
Many political analysts expect the Liberal Democratic Party to remain in power. But the party faces the immediate challenge of securing the majority of votes in the lower house needed to form a government with allies in the opposition.
In this month’s election campaign, the opposition did little to provoke a lively debate on the economy, instead focusing primarily on punishing the Liberal Democrats over a long-simmering political funding scandal.
On Monday, the Nikkei Stock Average and TOPIX index rose 1% to 2%, perhaps reflecting hopes that political turmoil will cause the Bank of Japan to delay raising interest rates again. The yen depreciated slightly against the dollar.
While the weaker yen may provide a temporary tailwind, “political instability is a concern for financial markets, and if it worsens it could contribute to a decline in stock prices,” said an executive at Nomura Research Institute. said Tohide Kiuchi, an economist and former central bank policy committee member. bank.
In recent years, with Japanese interest rates at their lowest levels, investors have sought higher returns overseas and the yen has weakened. This led to a rise in the stock prices of major Japanese companies that benefited from increased overseas profits. However, as inflation soars, the central bank has raised interest rates twice this year and has indicated plans to continue raising rates in the future.
For now, weak Liberal Democratic Party politicians and strong opposition parties are pushing for policies such as grants, grants and tax cuts aimed at appealing to pensioners and voters tired of rising inflation. It is expected.
Shigeru Ishiba, whose appointment as prime minister is in jeopardy after his party’s defeat, said before the election that the government would draw up a supplementary budget that would exceed last year’s $85 billion spending plan. However, the Liberal Democratic Party may be forced to further increase its budget to win support from opposition parties.
“There will be some level of uncertainty as the country looks for a path forward,” said Stefan Anrik, senior economist at Moody’s Analytics in Tokyo. But he added that “some stability will remain” because even the leadership of Japan’s main opposition party embodies many of the policies of the traditional Liberal Democratic Party.
Still, some of the pro-growth changes investors seek may be put on the back burner amid short-term political tensions, Monex Group’s Cole said. These include legal reforms to promote consolidation of Japan’s fragmented industries, which had made some progress before the election.
Koll and other economists have suggested that the Bank of Japan may actually act as a stabilizing force.
Before the election, many major banks and research firms predicted the next interest rate hike would be late this year or early next year. Japan’s central bank is scheduled to release its next monetary policy statement on Thursday.
Koll said political pressure on the Bank of Japan is likely to intensify in the coming months, but Governor Kazuo Ueda has made clear that the bank will raise interest rates at its own pace as long as the economy is on track.
“In that sense, the Bank of Japan may actually be a bastion of stability,” he added.
