Japan stock market may rebound as Ishiba revises economic policies

Shigeru Ishiba's election as the ruling party leader triggered a plunge in Tokyo shares late last month, but conditions may be on a recovery track as he has revised his market-shaking pledges since becoming Japan's new prime minister on Oct. 1, with a snap election now set for the end of the month.

Some analysts expect stock prices could gain momentum if the Liberal Democratic Party secures victory in the Oct. 27 general election, given Ishiba's signals that his government will prioritize measures to bolster the economy and buoy the market.

Moreover, if the LDP wins the national election and Ishiba establishes a stable government, receding uncertainties over Japan's economic policies could prompt investors to buy back Tokyo shares, the analysts say.

During the campaign for the LDP's leadership election, Ishiba, who dissolved the House of Representatives on Wednesday, was viewed as a lawmaker pursuing fiscal discipline and opposing excessive monetary policy easing.

After Ishiba won the LDP race on Sept. 27, the Japanese currency briefly jumped to the 142 range against the U.S. dollar, driving the 225-issue Nikkei Stock Average down nearly 5 percent amid mounting fears that exporter shares would extend their losses.

A rising yen usually dampens exports by making Japanese products more expensive abroad and cutting the value of overseas revenues in yen terms, while helping lower import costs for the country that relies heavily on foreign supplies for its energy and food needs.

Ishiba's willingness to implement higher financial income taxes for the "super wealthy" to address economic disparity at home also made market participants more reluctant to boost their holdings of Japanese stocks, dealers said.

Masahiro Ichikawa, chief market strategist at Sumitomo Mitsui DS Asset Management Co., said Ishiba has emphasized the "importance of fiscal reconstruction, inevitably worrying traders." Japan's fiscal health is the worst among major developed economies.

But the market turbulence, dubbed the "Ishiba shock" by investors, did not last long as he revised the pledges made during the LDP campaign, seemingly to alleviate concerns about his handling of economic and financial policies.

After meeting with Bank of Japan chief Kazuo Ueda last Wednesday, Ishiba told reporters he believes "now is not the right environment for an additional rate hike," suggesting he does not want the BOJ to rush into further tightening its policy.

Regarding fiscal policy, Ishiba named former Chief Cabinet Secretary Katsunobu Kato, one of the record nine candidates who ran in the LDP presidential election, as head of the Finance Ministry, which has been criticized for trying to promote tax hikes.

Kato, a former Finance Ministry bureaucrat, is known as a close aide to the late Prime Minister Shinzo Abe, who initiated the deflation-fighting "Abenomics" program, including drastic monetary easing, massive fiscal spending and a growth strategy.

In a group interview with media organizations on Monday, Kato said, "Based on the concept that finance depends on the economy, our goal is to strengthen growth potential," adding, "We will continuously build up necessary and effective policies."

Koichi Fujishiro, senior economist at the Dai-ichi Life Research Institute, said, "With the lower house election just around the corner," Ishiba's government "cannot propose tax increases, possibly stabilizing the share market."

Kato's appointment as finance minister also underscores how Ishiba "has no intention of conducting large-scale tax hikes, reassuring the market," Fujishiro said, adding that stock market volatility is likely to wane if doubts about the government's policies subside.

On the monetary policy front, Ishiba, a former banker, has reiterated he would respect the "independence of the BOJ," meaning he might allow the central bank to make a "careful decision" on another interest rate hike.

Kato also said he hopes the BOJ will manage monetary policy in an "appropriate" manner, "taking into account the economic, price and financial conditions," seemingly urging the central bank not to raise its policy rate soon, which could weigh on the economy.

The market "reacted too strongly" following Ishiba's election as LDP chief, Ichikawa said, adding, "Looking at the past, if a government is run stably" after national elections, such results have worked as a "positive" factor for the share market.

The Nikkei index has rebounded since Ishiba became prime minister, while the dollar rose again below 149 yen at one point on Monday, with speculation growing that the interest rate gap between Japan and the United States may not narrow sharply.

© KYODO