A new Prime Minister in Japan

Japan is about to have a new Prime Minister.

As PM Fumio Kishida steps down, former defense minister, Mr. Shigeru Ishiba has been elected as head of the Liberal Democratic Party. Since the LDP has the absolute majority of the Lower House, he will become the new Prime Minister of Japan on 01 Oct 2024.

Mr. Ishiba has been a member of parliament since 1986 and was the Secretary General of the LDP under former PM Shinzo Abe. He was the Minister of Defense from 2007 to 2008 and held other key cabinet positions including Minister of Agriculture, Forestry and Fisheries, and Minister for Regional Revitalization.

Ishiba is also known for his outspoken views on constitutional reform, particularly regarding Japan’s pacifist Article 9, which limits the country’s ability to maintain military forces. His vision includes a more assertive role for Japan in global security matters, aligning with his defense expertise.

The markets have reacted - the Yen strengthened and equities are under pressure because Mr. Ishiba is said to have a more conservative approach, carrying on the torch with regard to economic policies from his predecessor, Kishida. He will likely support the BoJ in terms of hikes.

He’s of the view that “Abenomics” needs to be reversed, aiming to pull Japan out of deflation through real wage increases, while tackling Japan’s aging population.

Monetary Policies

Mr. Ishiba maintains a hawkish stance and wants a gradual return to a world with positive interest rates. He will likely fully support the BoJ’s hiking cycle to ensure structural reform.

He’s of the view that the Yen has been too weak and that measures need to be taken to counteract the falling currency.

These views are not very different from that of PM Kishida, and will likely not be challenged by the party.

Fiscal Policies

Mr. Ishiba is known for advocating fiscal discipline. He’s been known to promote fiscal consolidation and scrutiny of using financial resources. He’s also supported the policy for increasing financial income tax.

With regard to energy policies, he’s talked about making sure nuclear plants are safe, and is disinclined to allow the construction of new plants.

Implementation of Policies

Mr. Ishiba has already called for a general election to take place on Oct 27, to formally be voted into power, instead of waiting until the end of the year. He wants to organize his cabinet as soon as possible.

One possible reason for the haste is that Mr. Ishiba apparently has a weak base within his party. So the implementation of new policies will be a challenge without the support of his cabinet.

An election in October also means that he doesn’t have to spend the next three months being wary of policy moves. He can start adjusting and implementing policy once elected.

Market Impact

The new PM has a hawkish outlook - supporting the BoJ’s hikes and tightening fiscal spending. Higher rates and lower spending will lead to a stronger Yen and pressure on equities. That’s exactly the reaction we’re seeing.

With time, some of these knee-jerk reactions will likely be reversed. But we need to consider being ready for a more hawkish BoJ ahead.

The issue of tax hikes will also be something that the market will keep an eye on. However, with Japan's fiscal position improving thanks to rising nominal GDP, a tax increase may no longer be necessary.

Instead, the emphasis will likely be on implementing policy measures that enhance productivity, which is crucial for sustainably raising real wages over the long term.