News on Wednesday morning of the resignation of Japanese prime minister Yukio Hatoyama after just eight months in power has caused much more of a political stir than a financial one, as the FT noted in a report with the distinctly unflattering (for the hapless Hatoyama) headline: “Markets shrug off Hatoyama’s resignation“.
(For more turgid background than you may want on the fall of Japan’s fourth prime minister in as many years, see FT Alphaville’s earlier post on the subject.)
As for investors and markets, Japan equities commentator Pelham Smithers of PSA summed it up on Wednesday in his daily client note (our emphasis):
“It was an interesting measure of the unpopularity that the DPJ [the ruling Democratic Party of Japan] has found itself in that the knee-jerk reaction to the departures of Hatoyama and [DPJ secretary-general Ichiro] Ozawa, was for the market to move up sharply into positive territory. However, optimism was fleeting as it became increasingly obvious that the move would merely cement the likelihood of a poor showing by the DPJ in the forthcoming Upper House elections, thereby almost certainly ensuring a loss of control of both houses in the Diet. As a result, we had an unusual upside-down V shaped day, as the market ended up down over 100 points, effectively imitating the pattern Wall Street had followed the night before.
As equities commentator Ryoji Musha told Bloomberg on Wednesday:
Hatoyama’s exit will be “very positive” for Japanese stocks because his replacement is likely to strengthen ties with the US government…
“His resignation will lead to reinforcement of the U.S.-Japan alliance, which helps Japan strengthen its position in the global economy.”
Japan’s relations with its key ally, the US, reached a low point under Hatoyama during months of debate, bilateral tensions and creeping domestic political paralysis over the thorny issue of relocating a US military base in the southern region of Okinawa.
Analysts largely see the resignation as a plus for Japan, though most warn of more political stresses ahead, particularly in light of upcoming elections for the Upper House of Japan’s parliament in July.
As Gavekal, the Hong Kong-based research house, put it on Wednesday (our emphasis):
even when everything is lined up for a Japanese win, somehow policymakers will manage to find a way to make a hash of things and investors will end up with a loss.
Given Hatoyama’s triumphant rise last year and his ignominious exit on Wednesday, this feeling is especially strong now on the political front, in Gavekal’s view. The resignation of yet another PM with a tenure of less than a year “raises the question of whether a democracy such as Japan’s – with a majority of voters now at or close to, retirement age – is governable”, Gavekal said.
But on more immediate matters, it notes (our emphasis):
- – It seems selling pressure is being borne on the yen to ensure the currency does not move above Y90 to the dollar. In other words, the ‘line in the sand’ that finance minister Kan hinted at a few months ago has so far been respected. This is good news as a rising yen usually leads to a dampening of animal spirits in Japan and repatriation of capital from abroad. Instead, the growing perception that the yen is now hitting a floor should lead to a renewed appetite by Japanese investors in exporting capital and increasing their risk. Needless to say, this would not be great news for JGBs [Japanese government bonds] but over the past decade, the correlation between JGB bond yields and Japanese equities has been almost perfect.
- – Over May, the Japanese monetary base grew by 3.7% YoY, or faster than the 2.7% YoY growth registered in April… we find this latest data quietly encouraging for it could symbolize the emerging presence of the missing ‘third pillar’ to Japan’s bull market, namely excess liquidity provided by the central bank (the other two being attractive valuations and decent economic growth).
The fact that the amount of yen in the system is no longer shrinking, and that the current government (for now, anyway, bar another “own goal”) is in essence inviting Japanese investors to increase their risk, “marks an important, positive change in the investment environment”, notes Gavekal. The Hatoyama resignation, therefore, “is a side-show. What matters is that the BoJ may no longer be sitting on its hands”.
For all the investor ennui over Japan’s upheavals, however, politics DO matter for some of the country’s markets.
At least, they do for RBS Securities’ Japan fixed income strategist Rui Xue Xu and economist Junko Nishioka, who see a promising outlook for the JGB market and for a possible consumption tax increase under a new DPJ cabinet. Notes Xue (our emphasis):
We said yesterday [Tuesday] that we think the Japan political fog would likely be a JGB market-moving factor from now on, which would probably have a two-sided effect. We maintain this opinion.
On the one hand, we think the political woes will likely continue to weigh on equities and therefore attract more flows into JGBs. Plus, if the new Cabinet becomes more fiscal reconstruction-oriented under the leadership of Naoto Kan (the current finance minister and deputy PM) who is the strongest candidate, we believe this would be JGB positive. Mr. Kan said in May that the government would make the biggest effort to keep the government deficit in the next FY below this FY’s JPY44.3trn, which will likely be included in the DPJ’s manifesto for the July Upper House election. He also has advocated a hike of the consumption tax rate, which is expected to soften the government borrowing pressure.
On the other hand, if a new cabinet were able to push through fiscal stimulus plans and other spending proposals “which the JGB market is paying great attention to”, on schedule in June, this could weigh on JGBs, argues Xue.
Ultimately, however, as MF Global’s Nicholas Smith notes on Wednesday, don’t expect much from any new political configuration:
For the DPJ, there are no good options here: pick a good replacement [for Hatoyama] and he’ll be tainted by the likely drubbing in [July] Upper House elections; pick a caretaker and they’ll have to live with a reputation for having a rotating door for PMs, and the DPJ is very experience-poor, so they can’t afford the losses. They have left it so late that it will be hard to wow voters before the election. But hooray for a hung parliament: their policy ideas have been so underwhelming, perhaps it’s best if they are prevented by political gridlock from getting those policies executed. Set your expectations low and expect to be disappointed.
Advises Smith: “If you want to understand Japanese politics, ignore parties and look at factions”. He concludes:
The DPJ never was one team with one dream. That makes forming a consensus around a bold and original plan almost impossible. Expect shades of drab.
Related links:
Steve Clemons: Obama takes down the (wrong) PM – HuffingtonPost
Hatoyama written off as lame duck premier – FT
Japanese prime ministerial resignations – Google timeline
Hatoyama’s pigeon impression – NewzJapan