(Bloomberg) -- Japanese Prime Minister Fumio Kishida’s decision to not run for a second term may clear the way for a new leader who is supportive of the central bank’s efforts to normalize policy, according to market strategists.
Among top contenders for leadership in the election for the presidency of the ruling Liberal Democratic Party in September are former defense minister Shigeru Ishiba, minister for digital transformation Taro Kono, party heavyweight Toshimitsu Motegi and minister for economic security Sanae Takaichi.
Markets fluctuated following the news, with the Nikkei 225 Stock Average falling as much as 0.4% after rising 1.3%. Japan’s currency was little changed at 146.89 per dollar, while the 10-year yield on Japanese government bonds fell 1.5 basis points to 0.83%.
Here’s what analysts had to say about Kishida’s announcement:
Yen and the BOJ
Yujiro Goto, head of currency strategy at Nomura Securities Co.
“If Kishida doesn’t run, there may be expectations it will be easier for Motegi or Kono to run. People may be buying the yen since both of them had spoken of the need for the BOJ to raise rates and correct the yen’s weakness prior to the July meeting.”
“Whether they can actually win is another matter, as recent polls show Kono’s approval rating falling and Motegi’s support remaining low.”
“Takaichi is the only person with the possibility to take a clear stance supporting a more accommodative policy, so that might push the yen lower again.”
Yuya Fukue, trader at Rheos Capital Works Inc.
“There’s speculation that upcoming government may support the BOJ normalizing its policy given that, apart from Takaichi, possible candidates to run for the LDP presidency such as Ishiba, Kono and Kato appear to be positive about policy normalization.”
“But a lot of investors have been preoccupied with dealing with market’s upheavals and haven’t paid a lot of attention to the LDP leadership race. I don’t think today’s trade is based on strong conviction.”
Eiji Dohke, chief bond strategist at SBI Securities Co.
“The BOJ will be able to proceed with its exit strategy more easily. Kishida was the most vocal in opposing a BOJ rate hike. Many of the next candidates are oriented toward normalization.”
“However, a rate hike by the end of the year has become more difficult.”
Stocks
Tomo Kinoshita, global market strategist at Invesco Asset Management Japan
“Since public approval rating for Kishida’s cabinet had been at a low level, there may be expectations that the change at the top will increase confidence and improve the ability to carry out policies.”
“It would be negative for stocks” if Japan’s push to make itself an asset management hub slows, as Kishida was highly regarded in the financial community for that initiative.
Shoki Omori, chief desk strategist at Mizuho Securities
“Market participants are going to dislike the uncertain situation, especially those investing in risk assets such as equities. Prime Minister Kishida pushed for the new NISA program and now he’s pulling back. JPY is going to depend on external factors, especially US data and the Fed. JGBs will still remain a supply/demand market. My initial view is that equities are going to be hit the most.”
Charu Chanana, head of currency strategy at Saxo Markets
“While Kishida’s stepping down could bring some uncertainty, his low approval ratings mean a significant negative reaction from equities may be avoided.”
Shinichi Ichikawa, senior fellow at Pictet Asset Management
“It’s hard to say who will take over after Kishida. But whoever becomes the next prime minister, what is almost certain is that there will be a dissolution of the parliament and a general election in October-November. That will make it even more difficult for the BOJ to make any moves. That may start to sink in for financial markets.”
Andrew Jackson, head of Japan equity strategy at Ortus Advisors Pte
“Kishida stepping down paves the way for Taro Kono to step up to the post like he nearly did back in 2021 when he lost out to Kishida. This could be another positive for defense-related names given he was minister of defense during the Abe administration.”
“While a lot has changed and the outlook for defense is a lot more accommodative since then, the market may still take it as a positive for the likes of Mitsubishi Heavy Industries, Kawasaki Heavy Industries.”
Bonds
Tomo Kinoshita, global market strategist at Invesco Asset Management Japan
Kishida “had been pursuing an aggressive fiscal policy, including an increase in defense spending. The new leader may not expand fiscal policy as much as before, which could have a positive impact on the bond market in terms of fiscal soundness.”
--With assistance from Mia Glass, Winnie Hsu, Momoka Yokoyama, Daisuke Sakai, Saburo Funabiki and Joshua Robinson.
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