- PM Kishida will not be running for another term in the upcoming September LDP elections
- His three-year term saw Japan’s largest wage increases in decades and corporate reforms which continue to deliver improved returns to shareholders
- BOJ gradual rate normalisation expected to stay on track; we maintain our forecast of the policy rate at 0.25% in 2H24 and 0.50% in 1H25
- Government stimulus focus should remain on reducing the strain of inflation on households; support for semiconductor industry to continue
- Continuation of progressive reforms is positive for market sentiment
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New winds, same sail. Japan’s Prime Minister Fumio Kishida will be stepping down next month, paving the way for a new leader of the ruling Liberal Democratic Party (LDP). Through his three-year term, Kishida had championed the concept of ‘New Capitalism’ which emphasised structural wage growth, the revitalisation of domestic investments, and the transition to a digital society. Under his watch, Japan saw wage increases from labour negotiations hit their highest level in 30 years; he had also pushed for corporate reform to alleviate years of capital inefficiency, improving returns to shareholders at a time where renewed investor interest saw Japan’s stock market indexes surpass historic highs.
The next PM will continue to face challenges from higher costs of living amid slowing global growth and a challenging geopolitical environment. Given the LDP’s dominance in parliament, it is nearly a foregone conclusion that the winner of its September leadership elections will take over from the outgoing Kishida. We do not expect deep policy differences that will significantly impact Japanese corporates and Japan equities.
Stimulus to support growth. From a government stimulus standpoint, key priorities should remain. Unveiled late last year, Kishida’s c.JPY21tn stimulus package focuses on cushioning the impact of inflation on households through measures such as temporary tax cuts and cash handouts. Highlights from the FY24 budget include measures to continue driving wage increments and the enhancement of national defense spending. The government also plans to allocate c.JPY2tn (USD13.7bn) to strengthen the domestic production of semiconductors, a significant increase from the JPY1.3tn (c.USD8.9bn) allocated previously.
BOJ policy deviation unlikely. However, Kishida’s departure has come at a crucial moment for Japan as it emerges from decades of deflation and where a recently resurgent yen abruptly upended a months-long rally of its stock market. Aligned with Kishida’s stance, most leadership candidates have indicated support for the central bank’s gradual policy normalisation. Bank of Japan (BOJ) Deputy Governor Shinichi Uchida noted earlier this month that the central bank is unlikely to raise rates during periods of heightened market volatility. Our economists maintain the view that BOJ is likely to keep the policy rate unchanged at 0.25% in 2H24 then raise it to 0.50% in 1H25, reaching a terminal level of 1.00% by Mar 2026.
While uncertainty could rise in the near term, continuation of progressive reforms should be positive for market sentiment. We continue to emphasise Japan’s semiconductor and IT services sectors as beneficiaries of rapid AI adoption, as well as financials as beneficiaries of interest rate normalisation.
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