Japan’s Prime Minister Resigns

Shinzo Abe resigned from his post as Japan’s longest-serving Prime Minister due to a decline in health, attributed to ulcerative colitis. The 65-year-old politician has been regarded as an integral figure in South-East Asian politics and economics for most of the last decade, having introduced a term known as “Abenomics” in an attempt to revive the stagnant Japanese economy. He left the position he acquired in 2012 with a year left in his tenure, an unexpected decision for both the general public and the stock market. His successor will be chosen through a parliamentary vote in mid-September and will hold the position until the end of Abe’s term in September 2021.


Post-World War 2, Japan’s economy had become the second-largest economy in the world, an achievement described by many economists as an “economic miracle” due to the significant growth in the Japanese economy. However, this economic growth abruptly ended in 1992, with an asset price bubble bursting and the stock market collapsing in Japan. While there are many factors underlying this market crash, it can be partly attributed to the Bank of Japan raising interest rates in 1989, which triggered the burst of the asset price bubble. What followed after the crash was two decades of stagnant economic growth and an economy trapped in a liquidity trap – now commonly known as Japan’s “lost decade”.


When Shinzo Abe came to power in 2012, he had the vision to revive the economy, which he would achieve by following a three-step plan. The first step was to fiscally stimulate the economy using stimulus packages; the government spent up to $210 billion in total, focusing heavily on building infrastructure such as bridges, tunnels, and earthquake-resistant roads, thereby increasing economic growth. The second step was an unorthodox monetary policy: The Bank of Japan injected liquidity into the economy using Quantitative Easing measures and simultaneously pursued negative interest rates. The final step in Abenomics was that of structural business reform: the Japanese government would decrease business regulations, corporate tax and liberalise the labour market, hoping to increase foreign direct investment. Moreover, Shinzo Abe intended to fight Japan’s demographic problem by increasing the number of women occupying the labour force – his target was to achieve a 73% female employment rate by 2020.


By 2017, the International Monetary Fund had broadly declared Abenomics a success. Japan had enjoyed its longest sustained economic growth run since the 1992 crash and maintained low unemployment rates. However, the Abenomics programme has not yet fulfilled all its intended targets: the inflation rate is still below the 2% target and the female employment target is yet to be reached. Furthermore, despite Abe advocating female empowerment, during his tenure Japan dropped in the World Economic Forum’s (WEF) gender equality rankings from 111th in 2016 to 114th in 2017.


Despite these shortcomings, Abenomics fostered stability in the economy and the financial markets alike. Under Abe’s guidance, Tokyo’s Stock Exchange – commonly referred to as the Topix – returned 85% in dollar terms. While the US’s S&P 500 outperformed these returns, the Topix significantly outperformed both the MSCI Europe and the MSCI Emerging Market indices. Shrikant Kale from the Jefferies Financial Services Company also noted that dividends given out by Japanese firms have increased twofold and share buybacks have increased fourfold to a record 22 trillion JPY since 2012.


Having outlined Shinzo Abe’s impact on financial markets, it is not surprising that his resignation is causing uncertainty amongst investors. Within a few hours of his announcement, the Topix index fell by more than 1.5% and the yen strengthened from 106.8 JPY to 105.6 JPY against the dollar – the yen often strengthens in times of volatility, consequently negatively impacting Japan’s export industry. Mr Oshibuku of SuMi Trust, a Global Asset Services firm, warned that a formal end of Abenomics could cause stocks to fall a further 6% in coming weeks before the new prime minister is elected in mid-September. Nevertheless, market uncertainty has resulted in the cheap valuation of Japanese firms, resulting in Warren Buffett investing 6 billion USD in Japan’s five biggest trading houses, as he looks to diversify beyond the US. Warren Buffet’s decision indicates investors’ confidence despite the political instability in Japan, as the country is built on a fundamentally strong economy.


The major fear that lies within the market is the reversal of “Abenomics” and the return of Japan’s “revolving door” politics where no prime minister stays in office for more than 17 months. This caused instability in the financial markets prior to the Abe Era and prevented growth, as it was increasingly difficult for politicians to push through long-lasting reform. Whether Japan finds a worthy candidate to replace Shinzo Abe in overseeing its economic growth and improving the returns in the financial markets is something that will remain to be seen in the coming months.


By Christine Mineva

Senior Editor: Jo Yean Kok


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