What The Market Is Saying About Shinzo Abe’s Resignation In Japan
Shinzo Abe is stepping down from his duties in Japan. The market learned this on Friday. For such an important world economy, what’s the impact, if any, on Japan and world markets?
The next prime minister will be decided on sometime in September and it is expected that a candidate who shares Abe’s economic views will replace him.
The continuity of “Abenomics” policies should come more into focus in the fall. But given the challenging post-pandemic global outlook, no major changes to current reflationary fiscal and monetary policies are expected anytime soon. This is good news for those who love the idea of the Bank of Japan being one of the world’s biggest buyers of securities.
“We would expect any successor to be very supportive of existing policies aimed at helping Japan recover in the wake of the coronavirus pandemic,” says Daiju Aoki, regional CIO for Japan at UBS Securities Japan Co.
Abe just announced his resignation due to deteriorating health conditions. His sudden resignation comes a time when Japan is still grappling with the coronavirus. The economy is even more stagnant than before thanks to the pandemic. His exit comes at a weak time in Japan’s economic health.
Stimulus has beens low.
His Cabinet delayed the consumption tax hike twice, and postponed promised fiscal reforms.
His government launched small fiscal stimulus packages to weaken the adverse effects from recent tax hikes. Public debt is over 200% of GDP and got worse while he governed.
“Wage growth has remained stagnant, which is in line with the very low labor productivity,” writes Alicia Garcia Herrero, chief economist, Asia Pacific, for Natixis in Hong Kong. “The much-needed reform of Japan’s dual labor market never came to bear fruit.”
Consequently, Japan’s potential growth has continued to decline.
The market was led by the Bank of Japan. After introducing the negative interest rate policy in January 2016, Japan has clawed back from that savings destroying mess.
They introduced the yield curve control, which has become part now of the QE tool kit for the Fed.
What the market thinks about Abe is that he didn’t do much to make Japan a growth story, but at least he didn’t sink it into the sea. It was BoJ governor Haruhiko Kuroda they tracked.
Kuroda has been “quite imaginative and has avoided the worst”, says Garcia.
Still, unless Abe’s replacement takes a different tack, monetary policy won’t be enough to make Japan a growth story, something Abe himself had once hoped for and will not leave it up to his predecessor. If they kick the tires, they’ll see Japan still has a flat.
Abe’s successors are likely to be ex-Defense Minister Shigeru Ishiba, Liberal Democratic Party Policy Chair Fumio Kishida, current Defense Minister Taro Kono and Chief Cabinet Secretary Yoshihide Suga, Bloomberg reported on August 26.
“With any of these candidates, however, we would expect ongoing support for fiscal expansion in order to make up for sluggish final demand under Covid-19 and for the BoJ’s role in facilitating the absorption of new bond issuance through quantitative easing and yield curve control,” says Tetsufumi Yamakawa, a Barclays Capital economist in Japan.
Japan’s third quarter is expected to be sluggish yet again. With little scope for policy changes and a sharp drop in household disposable income resulting from the fading effect of fiscal support such as cash handouts, Japan will be the weak link in Asia for sometime to come.