The Tokyo stock market is expected to struggle to rebound strongly after its recent slump as the economic policies of new Prime Minister Fumio Kishida add to concerns about the prospects for post-pandemic growth.
The Nikkei Stock Average benchmark of 225 issues fell 8.5% from a 31-year high reached in mid-September to close at 28,048.94 on Friday. The market was rocked by the China Evergrande group debt crisis and rising long-term yields on US Treasuries coupled with rising oil prices.
Market analysts say the key index is not expected to drop below this year’s closing low of around 27,000, helped in part by the US Senate approval on Thursday of legislation to temporarily increase the federal government’s debt limit and avoid the risk of default.
Yet the prospect of the decline being relatively small does not signal a rapid recovery unless market participants are fully convinced of what the new prime minister is looking to do to rejuvenate the pandemic-stricken economy, analysts say. .
Masahiro Yamaguchi, head of investment research at SMBC Trust Bank, said that while the recent sale runs out of steam, “the market is not currently in a position to climb to new levels either.”
Since Kishida won the leadership of the ruling Liberal Democratic Party on September 29, the Nikkei have lost 5.1%, with an eight-day losing streak until Wednesday – the longest since July 2009 – dubbed by some of the “Kishida Shock” on social media. He was elected Prime Minister on Monday during an extraordinary parliamentary session.
A market downturn is rare for a new prime minister, with generally high expectations for a new leader to take drastic action to attract voters.
Kishida, who is preparing for a snap election in the coming weeks, said he would aim for growth through “aggressive monetary easing, flexible budget spending and a growth strategy”, similar to the business model of his predecessors Yoshihide Suga and Shinzo Abe.
The new prime minister also pledged to reduce income disparities and create a virtuous circle of growth and wealth distribution as a pillar of his economic policy, but without giving details.
The market is struggling to understand how Japan can achieve growth through redistribution, analysts say.
“Prime Minister Kishida’s lack of specific economic policies is weighing on the market,” said Koichi Fujishiro, senior economist at the Dai-ichi Life Research Institute.
His government plans to compile an economic package worth “tens of billions of yen” to support individuals and businesses reeling from measures to curb the spread of the coronavirus. But analysts say it’s still unclear how effective the stimulus will be in propelling the world’s third-largest economy.
Market players are also wary of Kishida’s plan to consider an increase in capital gains tax and dividends as an option to carry out his redistribution policy.
In addition to these uncertainties, his cabinet’s modest approval ratings in media polls after the launch of his new government cast doubt on how effectively he will be able to implement his policies.
His cabinet’s approval ratings stood at 55.7%, below the 66.4% and 62.0% recorded at the start of Suga’s leadership in September last year and the second round of ‘Abe in December 2012, respectively, according to a recent Kyodo News poll.
“Kishida will have to come up with large-scale economic policies and refrain from raising taxes (on financial income) to lift stock prices out of their current slump,” Yamaguchi said, adding that to raise the market, he will have to show that he has a strong standing among voters as the October 31 general election approaches.
Market participants are also closely monitoring developments related to US monetary policy and the heavily indebted Chinese real estate developer.
Investors are focusing on “how (the United States) plans to alleviate lingering fears of rapid inflation,” said Maki Sawada, strategist in the investment content department of Nomura Securities Co.
Last month, the Federal Reserve signaled that a move was about to start scaling back its massive bond buying program in the wake of the recovery from the coronavirus pandemic, and hinted at a rise in prices. interest rate maybe next year.
Concerns about the fate of the Evergrande group have grown stronger recently following the temporary suspension of the company’s Hong Kong business activities and its Evergrande Property Services Group unit.
It is not yet known whether the Chinese government will launch measures to help the real estate developer giant.
“The direction of the market should remain uncertain until the myriad of overlapping issues are resolved,” Sawada said.
Nikkei extends losing streak to 8 days, first time since 2009
FOCUS: Tokyo Stock Exchange to remain firm under new LDP leader Kishida
Bank of Japan to closely monitor financial markets amid Evergrande woes