August 28, 2020

What Happened

Japan’s longest-serving Prime Minister, Shinzo Abe, announced his resignation to undergo treatment for a chronic illness. During his previous term as Prime Minister in 2007, the same disease forced him to leave his post, but he was able to return to run the country for a second time. Abe’s political party, the Liberal Democrat Party (LDP) is expected to hold an internal vote to pick his successor. He is expected to remain as a lawmaker and could continue to shape politics in Japan.

The next general election is not due until October 2021, but either the opposition or the LDP could call for an early election. The former defense minister, Shigeru Ishiba, the current finance minister, Taro Aso, and chief cabinet secretary, Yoshihide Suga, are likely candidates to replace Abe. Ishiba, already known as more populist than Abe, likely has an advantage with voters in the upcoming general election.

Our Take

Since Abe’s first departure from the office in 2007, Japan has had five Prime Ministers with an average tenure of only a year before Abe’s second run. With a record-setting political career, Abe is widely recognized as the beacon of political stability in Japan, similar to Merkel’s position in Germany.

Abe’s bold expansionary economic policy, known as “Abenomics” became the pillar of the economic revival during the first years of his second term. The so-called “three arrows”, (1) monetary easing, (2) fiscal stimulus, (3) structural reform, were designed to revive the Japanese economy out of stagnation that gripped the nation for more than two decades previously.

The new Prime Minister will face a daunting task, not just with the ongoing Covid-19 outbreak but also with the Japanese economy’s current dire situation. Consensus estimates assume that Japan’s Gross Domestic Product (GDP) will contract over 5% in 2020, and recover a little over 2% in 2021. Based on current projections, the economy would not return to pre-crisis heights until Q3 2022. It would take another six years to return to its pre-Covid growth trajectory assuming at least a 1.3% economic growth rate every year after 2022 (Figure 1).

Bottom Line

The new Prime Minister will be a member of the LDP, which has ruled the country for 60 of the last 65 years. Therefore, not much change is expected in the near term. Obviously, without Abe in place, it is hard to label the future economic plan as Abenomics. Inflation is still significantly below the Bank of Japan’s ultimate goal of 2%, and the economy is expected to shrink more than it did during 2009. What Japan needs is an economic plan even bolder than Abenomics in its current form.

A short period of leadership-related uncertainty is well warranted for Japan. We continue to recommend an underweight position in international developed markets equities, where Japan represents a sizeable country exposure.

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CN2020-1805 EXP12-2020