Economic Course-Setting: Japan's Path to the New Prime Minister

The transfer of power in Japan is imminent as the ruling Liberal Democratic Party (LDP) is about to elect a new party leader, who is likely to become the next Prime Minister. This election could have significant effects on the yen as well as the stocks of exporters, banks, and energy companies. With the forthcoming resignation of Prime Minister Fumio Kishida, the focus is primarily on monetary policy. This leadership change could pave the way for the Bank of Japan (BOJ) to continue its tightening course. Although the central bank is formally independent, political pressure regularly influences its decisions. "Regardless of who wins, the BOJ will have to get used to politicians increasingly attempting to influence banking policy," explains Phillip Wool, Head of Portfolio Management at Rayliant Global Advisors. "It will be frustrating, but given the current inflation and the importance of BOJ policy to voters, it is unavoidable." Among the nine candidates in the upcoming LDP election on Friday, three main favorites have emerged: the longtime LDP politician Shigeru Ishiba, the younger Shinjiro Koizumi, and Sanae Takaichi, who could become Japan's first female Prime Minister if elected. Their views on monetary policy range from hawkish to dovish, causing anticipation among market participants. Ishiba supports continued tightening by the BOJ, which could strengthen the yen but also slow down the broad stock rally fueled by benefits for export-oriented companies. Some investors fear his policies could burden the financial sector. Koizumi, the youngest candidate, is considered neutral for the markets. His support for raising interest rates could lead to a stronger yen and a rise in stocks. Particularly notable is his willingness to review restrictions on employee termination, which could increase labor mobility. His commitment to combating climate change could also have positive implications for green technology companies. Takaichi, who is a staunch advocate for supportive monetary policy, could keep the BOJ's course at a low-interest level, potentially weakening the yen and driving up stock prices. Her position could also favor the export of electronics and cars. The candidates are united in their stance on the reactivation of nuclear power plants, which is likely to benefit energy providers such as Tokyo Electric Power. Additionally, broad support for an expanded global role for Japan’s military could boost demand for defense stocks like Mitsubishi Heavy Industries and Kawasaki Heavy Industries. The election will take place on Friday afternoon, with the first-round results announced at 2:20 PM. If no candidate achieves a majority, a runoff will occur, with the results announced at 3:30 PM.