"Enemy" takes office, Japan bids farewell to "Abenomics"?

Advocate of Interest Rate Normalization, Hawkish Shigeru Ishiba "Surprisingly" Wins, the Impact on the Market is Significant. As the recognized "enemy" of Shinzo Abe, Ishiba's rise to power seems to imply the end of the era of Abenomics in Japan.

On September 27, former Secretary-General of the Liberal Democratic Party of Japan, Shigeru Ishiba, was successfully elected as the new president of the Liberal Democratic Party of Japan, and is expected to take over as prime minister after the parliamentary nomination election on October 1. The outcome directly ignited expectations of a rate hike in Japan. Japanese stock futures plummeted after hours, and the yen soared against the US dollar.

Unlike the support for loose monetary policy and active expansion of fiscal spending advocated by Abenomics, Ishiba is more in favor of normalizing monetary policy and holds a positive stance on fiscal consolidation.

Barclays analysts Naohiko Baba and Ryuichiro Hashimoto stated in a report on September 27 that Ishiba's victory may signal support for the normalization of the Bank of Japan's monetary policy. Reuters cited analysts' views that Ishiba's rise to power clears a hurdle for the Bank of Japan to further raise interest rates.

"Hawks" in Power, Balancing Monetary and Fiscal Policies

In March this year, the Bank of Japan ended negative interest rates and raised rates to 0.25%, marking a "milestone" move as it abandoned its aggressive stimulus plan of the past decade. After winning the election, Ishiba stated that Japan's monetary policy will generally remain loose, but also hinted that it will not prevent rates, which are still close to zero, from rising further.

Specifically, Barclays analysts noted that in terms of monetary policy, Ishiba advocates normalizing monetary policy, and among all candidates, he has taken the most hawkish stance, describing the recent performance of the yen as "weak" rather than "cheap":

"The long-term ultra-loose policy has deteriorated both the fiscal situation of Japan and the financial condition of the Bank of Japan."

However, he also expressed his attitude of "respecting" the Bank of Japan's rate hike decisions rather than "pushing" it in that direction.

Ishiba's policy stance is close to the current government's, supporting a gradual return to normal interest rate environment to boost the yen. Ishiba has previously stated that the "Abenomics" path needs correction, and a gradual return to a normal interest rate environment will help curb inflation and promote structural reforms.

It is worth noting that Ishiba has stated that he will push for improvements in fiscal conditions to promote sustainable and stable economic growth. He also mentioned the possibility of raising corporate and personal income taxes, indicating his positive stance on fiscal consolidation.

However, he also stated, "If necessary, we will deploy fiscal stimulus measures. The trend of loose monetary policy in Japan will not change."

Parting Ways with "Abenomics"

Chief Economist at Norinchukin Research Institute, Takeshi Minami, stated, "Ishiba's victory will make it easier for the Bank of Japan to achieve monetary policy normalization. In terms of economic policy, Japan is bidding farewell to Abenomics" According to a VIP article analysis from Wall Street View, during the era when Shinzo Abe almost "unified" the Liberal Democratic Party, Shigeru Ishiba can be said to be the only voice opposing Abe, so Ishiba can be said to have fought and lost repeatedly against Abe while Abe was still alive. In terms of economic policy, Takaichi Sanae inherited the loose monetary policy from Abenomics, advocating for actively expanding fiscal spending to boost the economy and stock market. However, Ishiba takes a more "hawkish" stance on monetary policy, stating in an interview with Reuters in August 2024: "Slowly achieving an environment with favorable interest rates under the backdrop of loose monetary policy may be the correct policy."

Regarding the deteriorating fiscal situation in Japan and its central bank, Ishiba also attributes these to Abenomics. Looking at this election, the market believes that, solely based on monetary and fiscal policies, Ishiba's market friendliness is lower than Takaichi Sanae's.

Economist Maeda Kazutaka from the Meiji Yasuda Institute also stated:

"Based on today's results, the impact of Abenomics will basically disappear, and the next rate hike could come as early as December."

Previously, Bank of Japan Governor Ueda Haruhiko stated that if the inflation rate continues to stabilize at the predicted 2%, the central bank will continue to raise interest rates. However, he emphasized that the central bank will take time to assess the impact of global economic uncertainties on Japan's fragile economic recovery