By Andy Chen
As soon as the plane landed at Tokyo Haneda, my phone buzzed with frenzied news alerts: a new Prime Minister of Japan has emerged! Everything has finally settled, with the surprising Shigeru Ishiba elected as the new president of the Liberal Democratic Party (LDP), succeeding Fumio Kishida during this particularly unique and sensitive period in Japan. This unexpected outcome sent shockwaves through the market, raising questions about how Japan’s renewed presence on the global financial stage will affect the United States, China, and the world economy. Can Shigeru Ishiba successfully implement his agenda without succumbing to external influences and interference?
On September 27, 2024, Shigeru Ishiba won a surprising victory over Sanae Takaichi in the second round of the elections, garnering 215 votes to Takaichi's 194. This news caused the USD/JPY exchange rate to surge from 146 to 142 (see Figure 1), as Ishiba is in favor of the Bank of Japan's trajectory of interest rate hikes, leading to a strengthening of the yen.
FIGURE 1. USD / JPY （2024.9.27-30）
Before the election, the market had largely bet on a victory for Sanae Takaichi. In the first round, Takaichi clearly led the voting (see Figure 2), with both Takaichi and Yoshihide Suga receiving the highest votes from parliamentary members. Takaichi had openly criticized the Bank of Japan for raising interest rates too quickly, and the market had partially priced in her victory. However, with Ishiba’s surprising win, the market swiftly adjusted its expectations.
FIGURE 2. THE TWO-ROUND VOTE COUNT IN THE ELECTION FOR THE PRESIDENT OF JAPAN'S LIBERAL DEMOCRATIC PARTY
Yoshihide Suga was previously considered a front-runner for the LDP presidency, with many media outlets expecting him to become Japan's youngest Prime Minister. Suga indeed secured the most votes in the first round, indicating a solid support base and the political legacy bequeathed by his father, Junichiro Koizumi. It also suggested that Japan's monopolistic zaibatsu class initially backed his candidacy. Once Suga entered the second round, whether facing Takaichi or Ishiba, his strong position within the upper ranks suggested a high likelihood of victory.
However, Suga lost ground due to a lack of local votes. Compared to seasoned politicians like Ishiba and Takaichi, Suga had weaker support among local party members. Furthermore, his inexperience in handling media scrutiny led to missteps, such as advocating for a challenge to dismissal rules to revive Japan's economic vigor, which raised public concern and forced him to retract his statement. He also suggested raising the pension eligibility age to 80 and admitted to media shortcomings. These detrimental remarks were quickly amplified by the media, contributing to his insufficient local votes and subsequent exit from the race.
In contrast to Takaichi, Ishiba publicly supports interest rate hikes by the Bank of Japan. After the Bank raised rates on July 31, 2024, Ishiba stated, “The Bank of Japan is on the right policy path, gradually aligning with global positive interest rates. The negative impacts of rate hikes, such as a stock market crash, are currently the focal point of concern. However, the advantages of rate hikes can reduce import costs and enhance industrial competitiveness.” His conclusion is that the Bank of Japan should better communicate the benefits of rate increases to the public, noting that exports account for only one-fifth of Japan’s GDP, while domestic demand drives the economy. Although export-oriented companies might benefit from a weaker yen, the inflation caused by a depreciating currency affects the majority of citizens more significantly (see Figure 3).
FIGURE 3. ISHIBA ENDORSES RATE HIKES
Our research reveals an irreconcilable contradiction between Ishiba’s proposed policies and his support for interest rate hikes. Overall, his agenda emphasizes increased government investment and high welfare spending. Given the challenges associated with tax increases, Japan’s debt and deficit will inevitably continue to expand. In this context, supporting the Bank’s rate hikes amounts to self-sabotage. Additionally, with inflation in Japan slowing down—Tokyo's core CPI has already dropped to 2%—the USD/JPY rate has risen from a low of 160 to 142, and the U.S. has begun its rate-cutting cycle. Therefore, expectations for Japanese interest rate hikes no longer align with the current economic environment.
Ishiba's agenda comprises five main areas: first, improving the image of the LDP; second, protecting Japan’s security in various domains, including diplomacy, demographics, economics, and finance; third, safeguarding citizens' welfare, focusing on salary and social security policies; fourth, protecting local economies; and fifth, enhancing job opportunities for youth and women. Many of these issues stem from political agendas and do not require detailed analysis, but three points warrant particular attention.
First, regardless of who becomes Prime Minister, there will be amendments to Japan’s pacifist constitution to unseal the military-industrial complex. This aligns with U.S. strategic demands; interested readers may refer to my previous analysis article, “Clearing the Clouds—The Underlying Logic of Japan's Prime Ministerial Candidates.” Whether it is Ishiba, Takaichi, or Suga, all candidates for the LDP presidency advocate for constitutional amendments to restore military strength, aiming to position Japan as a so-called "normal country" (see Table 1), which is also a demand from Japanese voters.
Among the nine candidates, Ishiba stands out as relatively moderate, being the only one to propose that the Yasukuni Shrine should separate its enshrinement of Class A war criminals and to acknowledge the Nanjing Massacre and the issue of comfort women. Since taking office as the Minister of Defense in 2002, Ishiba has not visited the Yasukuni Shrine and has explicitly opposed Prime Ministerial visits. However, it remains uncertain whether he will adhere to this stance upon taking office.
CHART 1. POLITICAL PLATFORMS OF MAJOR CANDIDATES
The Japanese populace, from top to bottom, desires a return to being a so-called "normal country," and given the U.S.'s genuine economic security needs regarding Japan (refer to “Investing in Japan: Twelve Years Ago or Now”), every politician seeks to leverage this sentiment to enhance their political achievements. This explains why all candidates advocate for constitutional amendments.
Behind this push lies a substantial military order from the U.S., encompassing ship maintenance, aircraft servicing, missile co-production, logistics support, and 70 items of defense cooperation (see Figure 4). Considering the U.S. military’s annual defense budget of over $800 billion, such collaborations will yield significant economic benefits for Japanese enterprises. Thus, irrespective of who is elected, there will be strong support for revitalizing Japan's military-industrial sector, creating tremendous opportunities for Japan's defense industry.
FIGURE 4. U.S.-JAPAN ANNOUNCE NEW MILITARY COOPERATION
In his policy agenda, Ishiba has also proposed “discussions to amend the pacifist constitution” and establish a “Basic Security Law.” The essence of this Basic Security Law is to achieve deterrent capabilities and create a North Asian NATO to counter China, which is a predetermined policy of the U.S. and largely independent of Ishiba's election outcome.
Secondly, Ishiba emphasizes that the Japanese government should continue expanding investments. He believes that overcoming deflation remains Japan's primary challenge. Specific investment targets include the semiconductor industry, aimed at enhancing Japan's semiconductor supply chain and stimulating private investment through tax incentives. He also advocates for increasing energy self-sufficiency to meet the explosive growth in electricity demand anticipated from the impending AI industry, including the construction of nuclear power plants and the development of geothermal energy. Lastly, he intends to support high-tech industries, declaring a five-year plan to position Japan as Asia's largest entrepreneurial hub, with a focus on developing artificial intelligence, quantum computing, and nuclear fusion industries, enhancing technological innovation and international competitiveness through collaboration between academia, industry, and government.
Finally, Ishiba's agenda stresses the need for Japan to maintain high welfare standards. He explicitly stated the goal of aligning wage growth with inflation rates, enhancing corporate capabilities in cost pass-through and price transmission. Other welfare policies include restoring minimum wages, promoting healthcare reform, providing essentials like food, clothing, and housing in-kind, and integrating free education to prevent poverty transmission. He plans to shift childcare support from subsidies to free services and to establish a dedicated disaster prevention department, aiming for zero fatalities from disasters using advanced technologies.
To assist in local economic development, Ishiba proposes a ten-year plan akin to China’s new urbanization model, focusing on integrating job opportunities, population appeal, and urban development. He also aims to promote the transfer of central ministries and agencies to local areas, improve local communication environments, and achieve digitalization to facilitate remote education, healthcare, and commerce. Realizing these objectives will necessitate substantial government investment!
Whether through expanded investments or sustained high welfare, Ishiba's agenda demands that the Japanese government increase expenditures. The question then arises: where will the funding come from? Government funding can originate from three main sources: taxation, debt issuance, and returns from government investments.
01
On Taxation
Ishiba's agenda does not explicitly propose tax increases; however, on September 2, during a program on BS TV, he mentioned his desire to tax capital gains from stock sales, which was part of Kishida’s initial agenda but has been shelved for unknown reasons. On September 23, during a live stream, Ishiba stated that there is still room to raise corporate tax rates, and some businesses may need to shoulder a higher tax burden. In contrast, Takaichi (currently the Minister for Economic Security) has consistently opposed tax increases for years. The Japanese government has faced repeated failures in implementing tax hikes, making it challenging to sustain the agenda through increased taxation.
FIGURE 5. ISHIBA SUPPORTS RAISING FINANCIAL INCOME TAX
02
On Debt Issuance
Ishiba’s agenda necessitates large-scale investments, which will undoubtedly escalate the deficit, with interest rate hikes directly increasing investment costs. Currently, inflation in Japan is showing signs of easing, with Tokyo's core CPI rising by 2.0% (see Figure 6). Tokyo serves as a leading indicator of inflation in Japan, and Bank of Japan Governor Kazuo Ueda has also noted, “The inflationary risks associated with a weak yen have abated.” However, the decline in inflation is merely one side of the coin; it suggests that the fundamental recovery of the Japanese economy remains precarious.
FIGURE 6. TOKYO'S CORE INFLATION RATE FELL TO 2%
Thus, neither Ishiba's investment plans nor the fundamental economic conditions in Japan support his intention to raise interest rates. Such an intention will encounter significant resistance during his administration. The most sensitive area, the stock market, is likely to experience a downturn due to substantial interest rate hikes. The previous article “Clearing the Clouds—The Underlying Logic of Japan's Prime Ministerial Candidates” already analyzed the causes and effects of the last stock market decline.
Moreover, with the U.S. just beginning its rate-cutting cycle, Ishiba’s expectation of raising rates contradicts the plans of U.S. capital, which was a major reason for Kishida's resignation. On July 31, 2024, when the Bank of Japan announced a 25-basis-point rate hike, the yen surged, with the USD/JPY rate climbing from 154 on July 30 to 144 on August 5, marking a 6.5% appreciation, leading many Wall Street funds engaged in carry trades to face margin calls. The surge of the yen also caused the Japanese stock market to plummet, with the Nikkei index dropping from 39,101 points on July 31, just before the rate hike, to 31,458 points by August 5, a staggering 19.5% decline. On August 14, Prime Minister Kishida announced he would not seek re-election as the LDP president. In a finance-driven capitalist country dominated by U.S. military presence and lacking sovereignty, if a Prime Minister directly undermines the interests of financial capital, his political future is bleak.
I believe that once Ishiba realizes this, he will likely suspend any plans for rate hikes. From the perspectives of implementing his agenda, advancing Japan's economic development, and aligning with U.S. capital strategies, raising rates should not be among Ishiba’s policy options!
03
On Government Investment Returns
As of March 31, 2023, the Government Pension Investment Fund (GPIF) of Japan achieved profits of 45.42 trillion yen, with a return rate of 22.67%, marking the best performance since 2001, while its asset management scale reached a historic high of 253 trillion yen. This profit accounted for 40% of Japan's budget expenditures for 2023, representing a significant proportion. However, pensions operate on a pay-as-you-go basis and are earmarked for specific uses, making it unrealistic to rely on consistently high returns from pension investments. In fact, some years have recorded negative returns (see Figure 7). Over the past 23 years, the average return rate of Japan's GPIF has been 4.3%.
FIGURE 7. GPIF Annual Return
Further analysis reveals that Japan's 253 trillion yen pension fund is split evenly between bonds and stocks (see Figure 8). More specifically, domestic bonds account for 26.95%, overseas bonds for 23.86%, domestic stocks for 24.33%, and overseas stocks for 24.86%.
FIGURE 8. 2023 JAPAN PENSION FUND ALLOCATION
Should Ishiba choose to raise interest rates, domestic bond prices will face downward pressure, and domestic stocks will likely experience even greater declines. While the yen's appreciation may offset some losses, the overall outcome would certainly be unfavorable. Notably, in the fiscal year 2023, Japan's pension profit of 45 trillion yen was largely contributed by the stock market, which accounted for 41.41% (19.4 trillion yen), while domestic bonds recorded a loss of 1.1 trillion yen (see Figure 9). If Ishiba follows through on his previous statements about gradually raising rates, Japan will face significant difficulties, and he may become another short-lived Prime Minister.
FIGURE 9. 2023 JAPAN PENSION FUND RETURNS
Conversely, if Ishiba pauses interest rate hikes, the yen may stabilize within the range of 140-145 after a brief appreciation. This would favor Ishiba's investment-focused economic policies, support Japan's economic recovery, and align with the U.S. rate-cutting trajectory, allowing him to maintain his position as Prime Minister for a longer period.
FIGURE 10. LIST OF BOOKS WRITTEN BY SHIGERU ISHIBA
04
结论
Shigeru Ishiba's unexpected rise to power caused the yen to soar. Initially, the monopolistic zaibatsu supported Yoshihide Suga, but the capital market then favored Sanae Takaichi, neither of whom managed to make it to the end.
Ishiba's support for interest rate hikes is fundamentally incompatible with his spending-focused agenda, especially amid Japan’s slowing inflation, substantial yen appreciation, and the U.S. entering a rate-cutting cycle. The expectations for yen interest rate hikes no longer fit the current economic landscape.
Regardless of who becomes Prime Minister, Japan will amend its pacifist constitution and vigorously develop its military-industrial sector, driven by U.S. strategic demands. All politicians advocate for constitutional amendments merely to capitalize on the sentiment and enhance their political achievements.
Ishiba's agenda focuses on continuing to expand investments and maintain high welfare, necessitating increased government spending. However, the ambiguity surrounding new tax revenue streams and the government's investment positions in Japan’s stock and bond markets suggest that raising rates could lead to massive fiscal deficits and increased future debt. Thus, maintaining low rates aligns with Ishiba's agenda and reflects Japan's economic reality. If he pushes for interest rate hikes that misalign with U.S. rate cuts, the outcome could be disastrous, leading to his swift departure and placing him among the ranks of short-lived Prime Ministers like Kishida.
In my view, with the current U.S. rate-cutting cycle underway, Japan's inflation pressures easing, and the yen rising from a low of 160 to around 140, the impetus for the Bank of Japan to raise rates will diminish. Consequently, Ishiba’s willingness to pursue rate hikes is likely to change. The market may be overinterpreting Ishiba's intent to raise rates at this stage. Therefore, I anticipate that after a brief appreciation, the yen may stabilize in the 140-145 range. If Ishiba adopts a more accommodative monetary policy (which I support as consistent with Takaichi's economic proposals), it would benefit his economic policies, aid Japan’s recovery, align with U.S. rate cuts, and meet U.S. strategic needs. This approach would also prevent the intensification of contradictions in his governance strategy, allowing him to sustain his leadership longer.
翻译自2024年9月28日文章
About the Author:
Andy Chen, graduated from the University of Chicago with a bachelor's degree in Economics and Statistics (Honors), with more than 24 years of experience in global financial industry. He founded DL Securities and DL Family Office successively , and was also the Responsible Officer of the licenses Type 1, 4, and 6 issued by HKSFC. He is now the Chairman of the Board, Executive Director and CEO of DL Holdings Group. Mr. Chen also serves as the vice president of Hong Kong Limited Partnership Fund Association.
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