Taking markets somewhat by surprise, the Asian country's premier has stepped down, and wealth managers comment on what they think are the likely implications for investors.

Late last week, Japan’s prime minister, Yoshihide Suga, announced that he was resigning, jolting international markets that hadn’t expected his departure. As one of the world’s largest economies, the policies followed by Japan are an important subject for asset allocators. 

The announcement appeared to be taken positively by equity investors. 

Following are views of a range of wealth management firms. 

The Global CIO Office
The stress and strain of leading a major nation through COVID finally culminated in Suga’s resignation. The equity market’s immediate interpretation of his resignation was anticipating a significant fiscal stimulus ahead of the general elections. Nevertheless, Japanese equities ended the week up 5.4 per cent. The TOPIX rose to its highest level in 30 years. We have remarked in previous weeks that the mix of significant upgrades to corporate profit forecasts and higher vaccination rates were grounds for optimism. Now throw in the more favourable political backdrop and increasing hopes for an expansive fiscal policy, and Japanese equities appear to outperform further.

There were already grounds for enthusiasm for Japanese equities. In two months, the country has gone from 14 per cent of the population fully vaccinated to 47 per cent, just six percentage points short of the United States. Over the same time frame, the consensus forecast for corporate profit growth has risen by seven percentage points. Higher vaccination rates support the increased optimism for a quicker reopening of the economy and the consequent improvement in corporate profitability.

We expect further positive performance from Japanese equities. Foreign investors are underweight the market versus a typical benchmark and may rush to cover their positions. After being net sellers for much of the past year, foreign investors have been net buyers of Japanese equities very recently. It’s also worth reflecting that the Nikkei 225 index is still languishing 25 per cent below its level back in 1989. A year ago, Warren Buffet made significant investments in Japanese trading houses, which many investors thought was foolish. Mr Buffett has already been proven right in his more positive view of the value in the market, and we are sure he believes that there is more return to come.

Naoya Oshikubo, senior economist, SuMi TRUST
The most likely outcome of the prime minister’s resignation for the economy is for the new LDP administration to preserve Suga’s interest in structural changes, such as digitalisation, decarbonisation and corporate governance reform, while adopting a more expansionary fiscal policy than the Prime Minister was willing to countenance. Overall, the chances of the LDP maintaining its single-party majority have also increased.

Investors should be feeling reasonably confident about this turn of events. The rise in the Japanese stock market following Mr Suga’s announcement on Friday (with the TOPIX hitting a 30-year high) reflects the lower risk of a big defeat for the LDP in the general election and expectations for major economic measures.

Currently, the two most likely successors to Mr Suga are former foreign minister Fumio Kishida and Taro Kono, minister in charge of Administrative Reform, both of whom are popular with the public. If either become the new Prime Minister, they are expected to continue the so-called "Abenomics" policy, which was handed down from the previous Abe administration, and maintain the Suga administration's policy pillars, such as digitalisation, decarbonisation and corporate governance reform. The difference will be their willingness to announce a range of financial support measures, such as rent subsidies, financial support for companies and benefits for people in difficulty. It can be assumed that the other candidates will also announce major support measures. Consequently, the new administration will be more expansionary in its fiscal policy in the short term than the Suga administration would have been, had it continued.

Guy Foster, chief strategist at wealth manager Brewin Dolphin.
The market was surprised at the announcement of Suga’s resignation as, despite dwindling popularity, he was all but assured of victory. The only declared candidate is Fumio Kishida. Given his plans to increase government spending, the development is seen as a positive one.

Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown
Investor confidence in the Japanese market had taken a hit as the country confronted its worst wave of the pandemic. The latest HL survey showed that confidence in Japan fell by 8 per cent in August, so it’s not surprising that the news of Yoshihide Suga's departure saw stocks in Tokyo lift in response. By announcing that he won’t run for re-election in the upcoming leadership race, he is stepping down as premier, to make way for a successor to try and halt soaring infection rates. 

Although the Nikkei ended up at 2 per cent, gains may have been held back, because Suga, who was considered to be pro-business, had spearheaded a drive to promote a more digital focused economy, and push firms to become leaner and more efficient to solve Japan’s sluggish productivity problem. Investor confidence in Japan is now likely to lift, but the political turmoil of Suga standing down after only just a year in position, following the near eight-year Abe era, may weigh on future gains. The ruling party is now in a race to find a new leader just weeks before the general election. As candidates jostle for pole position, uncertainty is likely to reign on the markets.