What does Fumio Kishida's withdrawal from the election mean for the Japanese economy?

For Japan, which is currently in the midst of a global financial storm, the news of Kishida's withdrawal is like a new stone thrown into a rushing stream, adding further uncertainty to its economic outlook.

According to a report by the Daily Economic News today, citing NHK news, Japanese Prime Minister Fumio Kishida is set to step down in September. Additionally, according to CCTV News, Fumio Kishida has expressed his intention to not participate in the Liberal Democratic Party's presidential election to party members.

Following the announcement, Japanese stocks plunged, with the Nikkei 225 index reversing by 0.43% and the TOPIX index narrowing its gains to 0.76%. The Japanese yen experienced significant fluctuations, with the USD/JPY pair briefly dropping nearly 80 points. Japanese government bonds surged, with the 10-year JGB yield falling by 1.5 basis points to 0.83%.

The shadow of "Black Monday" has not yet dispersed, and new variables are emerging. It can be anticipated that with the transition of power between the old and new Japanese prime ministers, Japan and even the global markets will face a new political test.

Fiscal policy may tighten, risk assets could suffer heavy losses

During Kishida's tenure, the world was in the post-pandemic era, leading him to advocate for expansionary fiscal policies to stimulate the economy, promote wage increases, successfully lead Japan out of the "lost three decades," and drive Japanese stocks and the yen to achieve historical highs and lows in over thirty years this year.

With Kishida announcing his withdrawal, can the long-term trends of Japanese stocks and the yen continue this year?

Reportedly, the current frontrunners in the upcoming LDP presidential election in September include former LDP Secretary-General Shigeru Ishiba, Minister of Digital Transformation Taro Kono, prominent party figure Toshimitsu Motegi, and Minister of Economic Security Sanae Takaichi.

Some opinions suggest that Sanae Takaichi may be the only one with a clear stance on adopting a more accommodative policy.

Therefore, Shoki Omori, Chief Japan Strategist at Mizuho Securities in Tokyo, pointed out that Kishida's withdrawal may imply fiscal and monetary tightening, potentially leading to heavy losses for risk assets, but it will still depend on the specific stance of the successor. Omori stated:

"Market participants will not like this kind of uncertainty, especially those investing in risk assets like stocks... In short, risk assets, especially stocks, may suffer severe blows."

Omori believes that the yen's movement will depend on more factors:

"The yen will depend on external factors, especially U.S. economic data and the actions of the Federal Reserve. Japanese government bonds will continue to be a supply-demand market."

Tomo Kinoshita, Global Market Strategist at Schroders in Japan, pointed out that fiscal policy may tighten, benefiting the bond market:

"Kishida has been pursuing an active fiscal policy, including increasing defense spending. The new leader may not expand fiscal policy as before, which could have a positive impact on the bond market in terms of fiscal prudence."

Furthermore, it is suggested that the successor to the LDP may also face risks such as increased cost of living, escalating geopolitical tensions, and the re-election of Donald Trump as U.S. President

Or pave the way for central bank policy normalization

Considering that Fumio Kishida had previously clearly opposed the Bank of Japan raising interest rates, and many candidates have explicitly advocated for monetary policy normalization, Kishida's withdrawal may pave the way for the Bank of Japan to raise interest rates again.

Eiji Dohke, Chief Bond Strategist at SBI Securities, pointed out:

"The Bank of Japan will be able to more easily implement its normalization strategy. Kishida is the most outspoken opponent of the Bank of Japan raising interest rates."

However, Dohke also mentioned that "raising rates by the end of the year" is a bit difficult.

Shinichi Ichikawa, Senior Researcher at Pictet Asset Management, shares a similar view:

"Regardless of who becomes the next prime minister, it is almost certain that the parliament will be dissolved and a general election will be held in October or November. This will make it more difficult for the central bank to take any action as it will have a broad impact on the financial markets."

What did Fumio Kishida do during his "thousand-day term"?

Since the end of World War II in 1945, Japan has seen 35 prime ministers, eight of whom have served for more than 1000 days, including Fumio Kishida. He ranks third in terms of length of term as a prime minister in this century, and during his tenure, he promoted many reforms that had a profound impact on the Japanese economy and society.

In October 2021, at the age of 64, Fumio Kishida was officially sworn in as the 100th Prime Minister of Japan.

Kishida took office at a time when the Japanese economy was in a long-term slump, exacerbated by the pandemic. Japan's GDP growth had shrunk for two consecutive years, still struggling to overcome deflation. The aging population further intensified the labor market's supply-demand imbalance, with weak trends in wages and economic growth.

As a moderate conservative, Fumio Kishida emphasized the balance between economic growth and social equity, advocating for a combination of government intervention and market mechanisms to achieve sustainable economic development and improve social welfare.

In September 2021, Fumio Kishida first proposed the concept of "new capitalism," aiming to promote a "virtuous cycle of growth and distribution." He advocated for strengthening "investment in people," expanding fiscal spending for economic and social reforms, building an inclusive society, encouraging local economies, etc. This became the most important economic proposition consistently upheld by the Kishida government thereafter.

In terms of specific policy measures, the Kishida government vigorously promoted raising basic wages, promoting equal pay for equal work, encouraging technology companies and startups, increasing investment in education and digitalization, among other areas.

Additionally, the Kishida government appointed Haruhiko Kuroda as the current Governor of the Bank of Japan last year, who is more inclined to be moderate and neutral compared to the former Governor, Masaaki Shirakawa