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Japan's Abe To Retire - Wealth Management Reactions

Tom Burroughes

31 August 2020

Shinzo Abe, who holds the record for the longest continuous term of any Japanese minister, has announced that he is retiring because of a long-standing health condition. Almost 66, Abe has been premier and president of the ruling Liberal Democrat party since 2012.

When Abe came to power, he vowed to revive the Japanese economy that had been in a multi-decade period of stagnation; his “three arrows” of monetary, fiscal and supply-side policy became dubbed “Abenomics”. While one of the world’s largest economies continues to face challenges, such as an ageing population, Japan remains one of the major financial and business powers. While not done to great fanfare, Japan has signed an important free trade deal with the European Union; it has a close and important trade/security understanding with the US, all the more important as Washington DC’s relationship with Beijing turns increasingly frosty. 

What does his departure portend, and what should wealth managers and their clients think? Like other news organisations, we have received a great deal of commentary about Abe’s resignation. Here is a selection.

Masaki Taketsume, fund manager, Schroder Tokyo Fund and Schroder Japan Growth Fund
Despite Abe’s imminent departure, we think there is likely to be continuity in both fiscal and monetary policy. We would also highlight Japan’s response to the COVID-19 crisis, which has been relatively more successful than other developed market economies. Meanwhile, Japanese corporates have strong balance sheets that leave them well-placed to weather a global downturn.

Abe’s departure is down to an existing health condition. Nevertheless, it is also the case that his popularity had declined, albeit his rating remained above the critical 30 per cent level. This low popularity came in spite of Japan’s relatively good virus data. Japan has taken a very different path through the COVID-19 crisis compared with other developed market countries. It has seen far fewer infections and deaths without the implementation of a strict lockdown.

The change in political leadership may cause some nervousness in financial markets, especially among foreign investors. Mr Abe is very closely identified with his government’s economic plans, under the banner of “Abenomics”. This has involved aggressive monetary easing, boosting government spending, and enacting reforms to make the Japanese economy more competitive.

In reality, since the LDP will remain the dominant party, we would expect little to change. In fact, this may be a good opportunity for a new leader to refresh the cabinet and refocus the pandemic response. The next prime minister may bring some differences in the emphasis on various structural reforms but overall we would expect continuity of fiscal policy. Monetary policy under the Bank of Japan Governor Haruhiko Kuroda will also be unchanged.

Eva Sun-Wai, junior fund Manager at M&G Investments
In response to the news, we’re seeing Japanese equity markets down, the Japanese Government Bond (JGB) curve steepening and the Yen up slightly. This is a good entry point rather than reason to worry – the JGB curve has been steep for some time now and the Bank of Japan is unlikely to tolerate a sharp deviation from their yield targets for too long. They have also vowed to retain their current pace of bond purchases in September. Japanese large cap stocks have some of the strongest balance sheets globally so we don’t expect equity markets to massively destabilise in the mid-term.

We expect some relatively higher volatility for a while as Japan goes through this transition phase, but we’re unlikely to see giant moves in its monetary stance going forward. When they embarked on their ambitious monetary easing and regulatory reform a couple of decades ago (eventually labelled ‘Abenomics’), they positioned themselves as one of the few low-rate markets and a region of stability during risk-off periods. Now, with global rates having fallen in line with Japan (‘Japanification’), there isn’t much reason for them to drastically shake up monetary or fiscal policies (especially in regard to JGB curve control).

What has made this more uncertain is the coronavirus pandemic, which triggered the worst economic contraction on record for Q2 in Japan. What investors will care more about in the short term is how Abe’s successor deals with virus numbers having increased in recent weeks (which was affecting Abe’s approval rating) – there are a few possible successors: Suga, Aso, Ishiba. The first two are part of Abe’s inner circle and will likely continue the policies the current administration has put in place to combat COVID-19 in Q3 and Q4. Ishiba is considered more populist.

In terms of the Yen, it’s unlikely to behave too differently from the past few months – now FX liquidity has improved in markets the Yen has somewhat resumed its status as a safe haven currency (having lost that title to the dollar for some time) – it may rise following JGB steepening but we don’t expect this to be sustained and investors won’t expect real rates to change. If the new Prime Minister does decide to shake up monetary policy and take a more hawkish approach, this may be positive for the Yen and somewhat tackle the decades of cheap loans that have kept unproductive companies alive and productivity gains low. But given super low inflation and the current pandemic, this looks pretty unlikely.