On September 27, Shigeru Ishiba was elected head of Japan’s ruling Liberal Democratic Party (LDP), leading to his appointment as prime minister on October 1. Ishiba is a seasoned politician who has served in high-ranking roles such as minister of defense, agriculture and regional revitalization.
Ishiba’s victory was initially greeted with pessimism in stock futures and yen markets, in part due to his comments on raising taxes and support of monetary normalization seen as detrimental to risk sentiment. However, we think the new PM is likely to keep many of predecessor Fumio Kishida’s key economic policies—something he reportedly pledged to do to secure Kishida’s endorsement during the voting.
Specifically, this could mean encouraging wage increases, stable inflation and corporate reforms, which could extend to small and mid-cap companies that have lagged in the recent bull market.
We see other implications as well:
Monetary policy: Ishiba previously criticized the Bank of Japan for aggressive easing and said he would support policy normalization including rate hikes. However, leading up to the election, Ishiba softened his rhetoric and has switched to saying that monetary policy should be accommodative, at least until Japan rids itself of deflation. His appointment resulted in yen appreciation, alleviating a key inflation pressure and reducing the likelihood of an accelerating BoJ hiking cycle.
Priorities: Ishiba considers foreign policy, national defense and regional economies to be among his top priorities. He won the support of many regional prefectures in the run-off election, suggesting he owes a debt to rural areas. A focus on strengthening these regions would bode well for the small to midcap companies that we favor, which generate most of their revenues from the domestic economy.
Risks: Politically, the ruling party appears deeply divided between supporters of Ishiba and rival Sanae Takaichi (a protégé of the late Shinzo Abe), which could lead to efforts to undermine the new administration. Internationally, Ishiba has been mulling changes to the U.S.-Japan security pact, which could affect relations between the two countries.
Overall, we believe Ishiba will largely provide continuity with his predecessor, maintaining policies that could help Japan end the “lost decades” of deflation through real wage growth and wealth distribution—which we believe should allay concerns of global investors. It’s worth noting that he decided to hold general elections on October 27, only a month after his selection. In our view, this reflects optimism that the ruling party and its coalition partners can retain their dominance on the political scene.
