The nation of Japan was stunned by the emotional announcement on August 28 that Prime Minister Shinzo Abe, in a fierce battle with ulcerative colitis, would be stepping down.
With speculation over Abe’s tenure and health running wild after a seven hour visit to Keio University Hospital on August 17, assurances had just been made by his long-time confidante and ally, Chief Cabinet Secretary Yoshihide Suga, that Abe would indeed serve his full term out to September 2021, and so Japanese financial markets took a small nose-dive on the news that the architect of “Abenomics” would no longer be sitting at the helm.
Japanese markets then stabilized on the notion that an Abe succession would be marked by economic policy continuity, which is by and large the case, especially with two and a half years left to run in the term of Bank of Japan Governor Haruhiko Kuroda. But not entirely.
** First, the LDP will meet tomorrow Tokyo time (tonight Eastern time) to determine one of two possible procedures to elect their new leader, and that will have a significant bearing on the odds of a total continuity successor, who is shaping up to be Chief Cabinet Secretary Suga himself, or a “change candidate,” embodied in former Defense Minister Shigeru Ishiba.
** In other words, tonight’s meeting may mean more for markets than the LDP election itself, and despite reports that the general polling favors Ishiba over all the other candidates, the LDP is suspected to be leaning towards a selection process that heavily favors greater continuity in Suga, at least for the remainder of Abe’s term.
** But whichever election process the LDP chooses, Ishiba, it is just being reported in Tokyo, has said he will not bow out, contrary to earlier rumors, a clever political move that in effect puts additional heat on the LDP establishment, and on tonight’s decision.
** As things stand, we believe Suga appears most likely to take over as Japan’s next prime minister, with the solid support of LDP Diet members, although Ishiba is still refusing to bow out. That is especially the case if the General Council of the LDP determines to elect the new leader via a “Joint Plenary Meeting of Party Members of Both Houses of the Diet.”
If not, the race is suddenly open.
Two Options to Electing a New PM
The LDP has two options for electing a new leader.
The first, and more normal process for elections, is to hold an LDP Party Convention. Under that process, each LDP Diet member is given one vote (394 Diet members can vote, excluding the two chairmen of both Houses), and LDP party members who are not Diet members can also vote. The total number of votes by non-Diet members is then adjusted to equal weighing with the votes by Diet members (394).
The second option is to hold a “Joint Plenary Meeting of Party Members of Both Houses of the Diet,” whereby each LDP Diet member is given one vote (394), and each Prefecture Liberal Democratic Party Branch gets three votes (47 prefectures times 3 votes results in 141 votes).
In the past, in the case of emergency (for example after the death of Prime Minister Keizo Obuchi in 2000), the LDP has held the joint meetings, which are faster, simpler, and of course give the party elders greater control.
And it is suspected that the LDP is again leaning towards a joint meeting, as the announcement of the intention to resign by Abe was sudden, and the Japanese economy is in such dire straits. It also happens to favor Suga, the most “establishment,” continuity candidate.
The election will be held around September 15, potentially even sooner in the case of option two, and either way the new LDP leader will only serve out Abe’s current term to September 2021.
After the LDP vote, an extraordinary Diet session will be convened, most likely on September 17, when all Diet members including what is left of an opposition to the LDP will vote for a new Prime Minister. Abe will formally retain his seat as prime minister until that day.
The Candidates and Their Policy Leans
Shigeru Ishiba: a former Defense Minister who has held several other senior posts in the past. He is popular in public surveys that are often reported in the press. Political analysts in Tokyo, however, note that handicapping an LDP race based on these public surveys is tricky in that the polling includes support from opposition constituencies who like Ishiba’s frequent criticisms of Abe. He is not as popular with LDP Diet members, especially as he once left the party (1993 – 1997), and he is seen by many as a defector.
Given these dynamics inside and outside of the Diet, it is far less likely that Ishiba would be elected as LDP leader through a joint meeting, option two. To illustrate, in the last LDP leadership election of 2018, Abe garnered 224 votes from non-Diet members and Ishiba got a solid 181, while among Diet members, Abe got 329 to Ishiba’s 73.
Ishiba of course has not been shy in challenging Abe, and if he were to become prime minister, he would change the policy framework of Abenomics. He is widely known for putting greater emphasis on a balanced budget, and would likely plan for a tax hike, and some redistributive policies, in the future.
Yoshihide Suga: the Chief Cabinet Secretary and one of Abe’s closest political allies, expressed an intention to run for the premiership that caught many off-guard. It is suspected that the top leadership of the party, in particular Toshihiro Nikai, Secretary-General of the LDP, pushed Suga to throw his hat into the ring to ensure an easy succession to Abe’s basic policy framework, or in the words of a Tokyo contact, to play relief pitcher until September of next year.
In talking with domestic institutional investors in Japan, many expect Japanese equity market to respond most favorably to the total predictability of a Suga transition. Although Suga does not belong to any faction in the LDP, he is given the highest odds of winning thanks to his support by key party members. But it is not yet a given.
Fumio Kishida: a former Foreign Minister and the current Chair of the LDP Policy Research Council. His support among the LDP members is not very strong (his faction, with 47 members, is 4th in number of members) and he has no experience in running a race. Like Ishiba, he is also seen on economic policy to put greater emphasis than Abe on balanced budgets.
Taro Kono: the current Defense Minister, is popular among the LDP base for his resolute attitude towards China, North Korea, and South Korea, and for his positions both as former Foreign Minister and present Defense Minister on the Senkaku Islands, Takeshima Islands, and other disputed regions.
As to economic policies, Kono’s framework is somewhat unknown. He belongs to the LDP’s second largest faction, the Aso group, and was cleared to run when the powerful Deputy Prime Minister and Finance Minister Taro Aso declared himself out of the race. Shinjiro Koizumi, Minister of the Environment, a young and popular figure in the LDP and son of the former Prime Minister Junichiro Koizumi, has said he would support Kono were he to run. But it is suspected Kono may be aiming for the “next chance,” in September 2021.
Suga and Continuity
Suga would continue the main policy framework of Abe, although he may not be so hawkish on foreign policy or aggressive in pursuing Abe’s unfulfilled wishes to amend Japan’s pacifist Constitution.
His number one priority would be to support an economy damaged by COVID-19, and he will offer extensions of the subsidies and low-interest lending provided by government-owned financial institutions.
We do not believe, however, that a reversal in the consumption tax hikes will be on the table, as it is suspected Suga will keep any changes in the consumption tax within the framework of long-run tax policies, rather than of short-term economic stimulus.
As to monetary policy, we expect Bank of Japan Governor Haruhiko Kuroda will likely keep the BOJ’s present stance until the end of his present term in April 2023, and nothing will materially be changed.
Even though Kuroda rose through the ranks of Japan’s traditionally orthodox Ministry of Finance, he has all but admitted that the BOJ is indirectly financing the Japanese Government through its massive purchases of Japanese Government Bonds in the secondary market, perhaps a sign of our times.