What a new government means for the stock market

It’s not just the USA that is faced with a choice of direction – it’s no different in Japan. But the mood in the two countries couldn’t be more different. Before the US presidential election, candidates Kamala Harris and Donald Trump are whipping up their supporters in large halls. The Japanese parliamentary elections on Sunday, on the other hand, are very personal and controlled.

A bus roof here, an upturned rice wine crate there, that’s what the election campaign stage in Japan usually looks like. Even the top candidates don’t gather crowds, just a few dozen or hundred onlookers. To do this, they spend a lot of time traveling through the prefectures. Videos of ugly attacks like those in the USA are frowned upon. Each party is allocated its slot on television. The election posters are also counted. Nevertheless, things suddenly become exciting.

The bourgeois coalition could lose its position

According to recent surveys, after twelve years of an absolute majority, the bourgeois coalition could lose what it thought was its minimum goal: the absolute majority of the 465 seats in the lower house. The sudden uncertainty also worries the economy. “The outcome of the early elections worries me very much,” says Takeshi Niinami, head of the business association and the beverage giant Suntory.

Japan needs stability, especially in the current geopolitical crises, the business leader argued on Wednesday at the G-Zero Summit, a security conference organized by the US security advisor Eurasia Group. Instead, Japan’s self-confident security policy and, above all, the business-friendly economic policy of the ruling Liberal Democratic Party (LDP) and its smaller partner Komeito are suddenly in jeopardy.

Many opinion polls predict a narrow majority for the coalition. But predictions from the left-wing newspaper “Asahi” and the right-wing “Sankei” make it more likely that the coalition will lose its absolute majority. The big winner could be the center-left Constitutional Democratic Party (KDP), whose predecessor the LDP pushed out of power between 2009 and 2012.

Why the stock market doesn’t like the opposition

The loss of the government majority would probably be a shock for the stock market. The strategists at Morgan Stanley MUFG assume that many investors see the KDP’s economic policy as a “significant risk” to the current economic development, more precisely to the economic recovery and the virtuous circle of moderate inflation and faster rising wages.

The reason: The new party leader Yoshihiko Noda, Japan’s last democratic prime minister, has led the party programmatically to the center. But he plans to dismantle the very expansionary fiscal and monetary policies established by his then-successor, Shinzo Abe of the LDP. His economic policy has significantly fueled the Japanese stock market.

The opposition KDP instead wants to reduce the central bank’s inflation target from two to zero percent. This would allow the Bank of Japan to raise interest rates faster and more than previously planned. This could be at the expense of growth and inflation.
On the other hand, the Democrats want to increase corporate and capital gains taxes in order to have more money available to support the middle class. Higher taxes are another horror for stock market investors.

The conservative LDP remains the stock market’s favorite

The new conservative head of government, Shigeru Ishiba, is the more popular candidate among the capitalist clientele, although he wants to raise the minimum hourly wage by a third to 1,500 yen (8.50 francs) by the end of the decade. Apart from that, he wants to stick to the current economic policy.

Despite a national debt of 250 percent of economic output, Ishiba is not pursuing any tough austerity budgets or tax increases for the time being. When it comes to monetary policy, the LDP does not want to change the central bank’s current course either. The central bank wants to continue the interest rate turnaround that it initiated in March after almost 25 years of zero and negative interest rate policy. But the inflation target of two percent is slowing the momentum because it has almost been reached.

Japanese discover the possibility of a change of government

For the Japanese, the sudden realization that they can vote out the LDP, which has been in power almost continuously since the 1950s, is unexpected. Because so far everything looked like business as usual. The LDP has lost a lot of popularity after numerous scandals. So far, however, it has always been able to make up for the losses.

At the end of September, the LDP resorted to the usual tactic: it replaced the head of government. This is usually followed by a small poll high, which the governing party then promptly uses to hold new elections.
Fumio Kishida, who came into office in a similar manner in 2021, was succeeded this time by Shigeru Ishiba, a proven security politician and self-proclaimed clean man. He should succeed where Kishida had failed: make voters believe that the party is purifying itself.

On paper, Ishiba was the right man. He has made a name for himself over the years as an open critic of his party. But this time the recipe doesn’t seem to work. The government’s approval ratings only rose briefly; Ishiba’s performance seemed too weak.
Since then, there has been panic in the LDP. It is not even clear whether she will also lose power if she loses the majority. Rin Nishimura, Japan expert at the Asia Group, sees two major scenarios in this case: A left-to-right minority government around the KDP, which might then have to govern with the toleration of the communists. This would probably be an unstable government.

An alternative would be to expand the government coalition to include one of the more conservative opposition parties or to poach MPs from the parliamentary competition. But the government could also defend its majority. In this case, the stock market should react with relief. In any case, the elections in Japan this time are much more interesting than before.