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Fertility, phones, reforms: a trader checklist for Suga's Japan

Bloomberg • 4 min read
Fertility, phones, reforms: a trader checklist for Suga's Japan
Market watchers are eyeing what the election of the unassuming son of a strawberry farmer means for the country’s equity markets.
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With Yoshihide Suga now a certainty to be formally declared the next prime minster of Japan on Wednesday, market watchers are eyeing what the election of the unassuming son of a strawberry farmer means for the country’s equity markets.
While Suga had long been seen as one of the top contenders to replace Shinzo Abe when he stepped down, the speed at which ruling Liberal Democratic Party elders moved to throw their weight behind him was nonetheless surprising -- although so far his policies haven’t turned heads.

“In the short-term we don’t expect any major shifts in policy until the Covid-19 threat has disappeared,” Jefferies analysts including Sean Darby wrote after Suga’s appointment by his party. “Japan is recovering much quicker than the markets would have expected three months ago. Strong monetary growth accompanied by tangible profits ought to keep a bid on Japanese share prices.”

One group less than pleased to see Suga as prime minister will be investors in Japan’s mobile carriers. Suga has spent much of the past two years attacking the three legacy carriers for their perceived lack of competition, which Suga contends has led to Japanese customers having higher mobile phone bills than those in other countries. He has also repeatedly highlighted the fat profit margins of the three, and on Sunday threatened to raise the fees the carriers pay for the use of radio waves.

NTT Docomo Inc. and KDDI Corp., the country’s two largest carriers, have lost a combined $20 billion in market value since Abe announced he was stepping down. Shares in Rakuten Inc., which has recently entered the market as the fourth carrier in a move meant to spur competition, have meanwhile risen 31%.

Docomo and KDDI continued sliding on Tuesday following Suga’s appointment, both dropping more than 2%.

Fertility stocks

“With the exception of several major telecom stocks, Japan’s risk markets have been pleased with Suga’s clear front-runner status, and will likely continue to be so after his easy victory,” wrote John Vail, Nikko Asset Management’s chief global strategist. “He is not only continuing Abenomics, but likely enhancing its Third Arrow economic reforms. Japan continues to have one of the most stable and business-friendly governments in the developed world.”

One area of Suga’s focus that has lit up equity markets since he began campaigning to replace Abe has been a call to cover fertility treatments under the national insurance system, in an attempt to shore up the country’s falling birth rates. Shares in companies involved in fertility treatments have been an early “Suganomics” winner, with Aska Pharmaceutical Co. up 15% and CellSource Co. adding 40% since Abe stepped down on Aug 28.

Next Cabinet

With Suga now confirmed as head of the ruling party, focus is shifting to who he will pick for his cabinet, which is set to take office on Wednesday. Deregulation, structural reforms and support for Japan’s regional areas are expected to be focuses of the cabinet, which must first tackle the ongoing damage of the coronavirus pandemic. The cabinet will be filled with “reformers,” Suga said Monday.

Structural reforms will buoy Japan’s potential growth rate and exert an upward pressure on bond yields over the longer term, according to Mitsubishi UFJ Morgan Stanley Securities.

Local media reports indicate that Finance Minister Taro Aso and Foreign Minister Toshimitsu Motegi will retain their roles in the new administration. Health Minister Katsunobu Kato is being eyed to replace Suga as Chief Cabinet Secretary, NTV reported.

But the main question for market watchers is likely to be the prospect of a possible snap election.

“Given the industrial reforms and deregulation Mr Suga strongly desires to achieve will likely take time to implement, we expect attention to focus on whether the new administration goes to the polls by year’s end in a bid to secure enough time for policy implementations,” Goldman Sachs economist Naohiko Baba wrote in a note Monday.

With Suga’s support riding high, a snap election could be a positive for equity markets. SMBC Nikko analysts Masashi Akutsu and Hikaru Yasuda wrote in a Sept. 2 note that share prices tend to start rising from around 30 days before a lower house election and accelerate after the vote, in cases when the ruling LDP didn’t lose seats.

Suga said Monday it was difficult to dissolve the lower house and call a snap election due to the virus situation, but indicated that could change if the pandemic started to die down.

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