A Stock Operator’s Guide to Japan’s First New Prime Minister Poll

(Bloomberg) – Investors are nervously preparing for Sunday’s Japanese general election, with the prospect of a surprise outcome creating choppy moves in recent days.

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The ruling party in Japan is facing voters for the first time in about a decade without Shinzo Abe at the forefront. Markets are unsure of what to expect from newly elected Prime Minister Fumio Kishida with a Topix down nearly 2% since he was chosen to lead the Liberal Democrats. During the same period, the MSCI Asia-Pacific Index gained 1%.

This has made investors anxious in a country where the LDP has ruled for all but four of the last 66 years. Recent polls have shown that voters are not crazy about Kishida. The opposition parties, although they do not have a charismatic leader either, are this time better coordinated than in recent years.

While most people expect the ruling coalition to lose a few seats while retaining power, traders will focus more than usual this time on the Halloween election as there are still many uncertainties. Here’s a look at what the potential scenarios could mean for Japanese stocks and analysts’ trading strategies.

Win easily

While Kishida has publicly stated that he would consider a simple majority for the coalition of the PLD and his partner Komeito a success, many believe he would want a better performance than winning just 233 seats out of 465 available. Obtaining a total of 261 seats would mean an “absolute stable majority”, allowing control of the standing committees of the lower house.

Some polls have indicated that the PLD alone could retain the majority. Such a result would be seen as a solid performance, encourage the market and help consolidate Kishida’s post as prime minister.

This scenario “would help build political capital for Kishida-san’s progressive political tilt,” Morgan Stanley MUFG Securities Co. economists, including Robert Feldman, said in an Oct. 27 memo.

Naohiko Baba, economist at Goldman Sachs Group Inc., said in a note that whenever the PLD got a majority, stocks “had a strong tendency to rise before the election and to rally even stronger after the close. ballots “.

Narrow victory

As the LDP has seen some seats give way, the focus is now on the extent of the damage to the party.

Morgan Stanley says “significant” seat losses of more than 40 would weigh on Japanese stocks in the near term as concerns increase over the stability of the government. The failure of the PLD to secure a majority would be bad for Kishida and would make the party more dependent on Komeito.

If the LDP cannot maintain a majority on its own, Kishida’s authority within the party will decline, according to Jin Kenzaki, head of research on Japan at Societe Generale SA. He sees a 50% chance that the LDP will not retain the majority. In this scenario, Kishida would not resign immediately and he could bolster his economic stimulus package, Kenzaki said.

Some analysts added that the poor performance of the LDP could force Kishida, who has been vague about what his “new form of capitalism” really entails, to adopt more understandable policies, or even accelerate a change of direction.

The optimal scenario for the market could be that the coalition is doing well, but the LDP changes its leader, said Richard Kaye, portfolio manager at Comgest Asset Management Japan Ltd.

Scary surprise

Although people think that split opposition is unlikely to overthrow the government, it is a possibility as this election is held on Halloween.

Yukio Edano, leader of the biggest opposition party, rated the odds of a historic change in power at about the same level as baseball star Shohei Ohtani’s batting average: 0.257, or about one in four. The ruling coalition would need to lose more than 72 seats for this to happen. A change of direction could scare the markets.

Such a scenario “would be more negative for Japanese stocks given the potential uncertainty regarding the formation of the government and the resulting political platform,” according to Morgan Stanley MUFG.

Post-election documents

Kishida has postponed the details of many of his economic policies until after the election, with many investors still unsure whether his redistribution policies are just talks or will be followed by action.

“I think it’s hard to know what he really represents,” said Kaye of Comgest.

However, some sectors could benefit from an LDP victory – or fall if a poor performance by Kishida accelerates a change of direction. They include the country’s tourism, technology and energy sectors.

Tourist trap

Although Japan has some of the strictest border controls among developed countries, opposition politicians have pleaded for even tougher measures. Kishida has yet to say when Japan may seek to reopen its borders, but once the elections are over, a plan may be imminent.

“A reopening of tourism, especially from Asia, seems likely soon,” CLSA’s Nicholas Smith said in a report.

First, Kishida is likely to revive the ‘Go To’ national travel and meal subsidy programs that began in 2020 but have been put on hold amid a Covid resurgence. This should benefit East Japan Railway Co. and hotel-related actions, Smith wrote, adding that coalition partner Komeito is pushing the LDP even more to restart programs.

Technological transformation

A “digital transformation” of the paper-heavy Japanese bureaucracy was a key policy of Kishida’s predecessor, Yoshihide Suga. The LDP kept it and combined it with Kishida’s “digital garden city” idea to use new technologies to boost regional economies. Companies offering work-from-home technologies, 5G, remote medicine and a range of startups promoting the digitalization of office tasks should continue to benefit. The LDP manifesto also emphasizes cybersecurity.

Meanwhile, Japan’s belated move to boost its semiconductor industry is starting to pay off, Sony Group Corp. preparing to partner with Taiwan Semiconductor Manufacturing Co. to build a chip factory in Japan, a Kishida investment valued at 1,000 billion yen ($ 8.8 billion). . Kishida also appointed an Economic Security Minister who described the move as a first step in reviving the Japanese chip industry. Companies in the supply chain will continue to be the focus for the next few months.

Fresh energy

As Suga had said that Japan will aim to become carbon neutral by 2050, it is up to Kishida to start the implementation. The LDP is considered nuclear-friendly and aims both to restart nuclear reactors and to invest in small, new-generation modular reactors.

The biggest opposition parties tend to oppose the construction of new nuclear power plants, so a good performance for them in some districts could be bad news for utilities that depend on nuclear power.

Suga’s decision “was a major change in leadership,” said Tomo Kinoshita, global markets strategist at Invesco Asset Management in Tokyo. “Renewable energy technology and related actions will be the focus of attention. “

(Updates to add details on areas to watch from 17th paragraph)

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