(Bloomberg) — As Japan’s ruling party gets set to vote for a new leader who will then likely become the nation’s next prime minister, traders are preparing for the potential impact on the yen and shares of exporters, banks and energy companies.
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The effect on monetary policy is the key point to watch, as the exit of Prime Minister Fumio Kishida is seen as potentially clearing a path for the Bank of Japan to continue tightening. While the central bank is independent from the government, it has regularly been subject to political pressure.
“Regardless of who wins, I think the BOJ will have to get used to politicians speaking out more often to try to influence the central bank,” said Phillip Wool, head of portfolio management at Rayliant Global Advisors. “That will be frustrating, but it’s just a reality now that inflation and BOJ policy are much more front and center in the minds of voters.”
The Liberal Democratic Party leadership election set for Friday features a record nine contenders, though focus has narrowed to three leading candidates. Long-serving LDP politician Shigeru Ishiba and the younger Shinjiro Koizumi are both seen as fairly hawkish on monetary policy. Sanae Takaichi who, if elected, could become Japan’s first female prime minister, wants to keep interest rates low.
Government rhetoric on BOJ policy can sway the yen, which has begun to strengthen after touching its weakest level since 1986 earlier this year. Beyond the resulting forex impact on the nation’s exporters, the LDP leadership race has implications for stocks in sectors from defense to human resources.
Here’s a deeper look at some of the main issues investors will be monitoring related to the election:
Shigeru Ishiba
Ishiba is seen as supportive of the central bank’s plan to continue gradually tightening as a way to bolster the yen. Traders fear this may damp the broad rally that drove equity benchmarks to record highs on perceived benefits for companies selling products overseas.
With Ishiba and fellow veterans Taro Kono and Toshimitsu Motegi, “there’s a risk these candidates are too hawkish, which would be a headwind to stocks and could lead to excessive yen volatility,” said Rayliant’s Wool.
Investors have also expressed caution over Ishiba’s stance in favor of raising taxes on financial income.
One sector that could benefit if Ishiba takes power and the BOJ raises rates is banking. The Topix Banks Index had been outperforming on expectations of tightening, though its gap with the broader gauge has narrowed.
Shinjiro Koizumi
The youngest contender at 43, Koizumi enjoys popularity among his fellow lawmakers. If elected, the son of former Primer Minister Junichiro Koizumi is expected to largely continue Kishida’s policy track and support raising interest rates.
Koizumi would likely be the “most neutral for markets,” with the initial results possibly being a “bear flattening of bonds,” with gains in stocks and a stronger yen, Naka Matsuzawa, a strategist at Nomura Securities Co, wrote in a note.
Among particular issues, Koizumi has said he would review restrictions on firing employees, which could lead to more mobility in the labor market and benefit companies such as Recruit Holdings Co. and Dip Corp.
The former environment minister is also known as an advocate for the fight against climate change, which could have positive implications for companies from green tech provider Hitachi Ltd. to solar firm Renova Inc. He is also in full support of ride-sharing.
Sanae Takaichi
Takaichi, who could wind up becoming the first woman to lead Japan, has been a staunch advocate of easy monetary policy, saying just earlier this week that “it’s stupid to raise rates now.” Her support of the reflationist policy platform of former Prime Minister Shinzo Abe is the biggest differentiating factor of her candidacy.
Any delay in the BOJ’s raising of interest rates may keep the Japanese currency weak. That could have knock-on benefits for shares of exporting electronics and auto makers. It could also provide tailwinds for the wave of inbound tourism that has benefited department-store operators like Isetan Mitsukoshi Holdings Ltd.
“If she wins the LDP presidential election, the initial reaction in the markets will probably be a weaker yen, lower interest rates and higher stock prices,” said Naomi Muguruma, fixed income strategist at Mitsubishi UFJ MS Securities Co. “There is a sense that fiscal policy will be expanded and monetary easing will be prolonged.”
Other Issues
One thing on which most of the candidates are united is support for the restart of nuclear power plants. Utilities such as Tokyo Electric Power Co. would be among the biggest beneficiaries as lower-cost fuel meets with a surge in demand as Japan aims to beef up its presence in the power-hungry semiconductor ecosystem.
The majority also favor a larger global military role for Japan, with the nation’s defense ministry having already requested a record budget for the fiscal year starting in April. Defense stocks such as Mitsubishi Heavy Industries Ltd. and Kawasaki Heavy Industries Ltd. are among the top gainers this year on the Nikkei 225 Stock Average.
The vote will take place Friday afternoon, with results of the first round scheduled to be announced at 2:20 p.m. There will be a runoff if the top candidate fails to win a majority, with the results to be announced at 3:30 p.m.
–With assistance from Masahiro Hidaka, Daisuke Sakai and Yuki Hagiwara.
(Adds details on vote schedule in last paragraph)
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