Updates on the Political Scene in Japan, Portugal and Spain

Whilst most focus seems to be on American politics and the main UK parties’ infighting, 2024 has plenty of developments in the rest of the world to keep an eye on. With that in mind, here are three from recent days—two from the Iberian peninsula and one from the Pacific Rim. We mentioned several of these in our yearend 2023 roundup and since. Now there are updates on all three. Let us run through them for you.

But before we begin, please note that MarketMinder Europe favours no politician nor any party in any nation. We assess developments solely for their potential market impact. With that out of the way, here we go.

Japan’s Fundraising Scandal Winds Down

Several weeks after news of a campaign finance scandal within Japan’s ruling Liberal Democratic Party (LDP) broke—and threatened to end Prime Minister Fumio Kishida’s time in power—the saga is nearing a resolution that we think is likely to reduce uncertainty for the time being.

The scandal entailed the LDP’s factions, which function as parties within the main party. In addition to having their own policy agendas, the factions wield their clout and money to shape the cabinet. Our analysis finds becoming prime minister has historically required the support of the biggest, most powerful groups.

The largest and most influential faction is named for late Prime Minister Shinzo Abe, who led it before his assassination in 2022. It was a key backer of Kishida’s, though he wasn’t a member himself.

There were plenty of rumblings about the faction’s alleged misuse of funds and kickbacks to members flared whilst Abe was in charge, and he advocated cleaning up the books.^[i] His successors continued talking up reform efforts, but they don’t appear to us to have borne fruit, and criminal investigators eventually started circling. The news tanked Kishida’s and the LDP’s poll numbers, and a handful of indictments further roiled voters, seemingly putting the government’s survival in question—and, from our vantage point, raising political uncertainty.^[ii]

Now it is perhaps quieting down, to an extent. In addition to adopting stiff penalties for financial wrongdoing, the LDP has adopted new rules that will end factions in their present form, stripping their fundraising and cabinet-appointment powers. They will continue as policy groups only. Kishida has also managed to stay in power, albeit with polling continuing to plumb the depths, and it seems his lack of formal faction affiliation has seemingly allowed him to appear above the fray.^[iii] Nothing is certain, of course, but for now it looks to us like Japanese stocks won’t have to deal with a sudden government change or snap election.

Looking ahead, we see more opportunities for uncertainty to fall. The LDP’s next leadership election is in September, and Kishida could have challengers. The new faction system could make the outcome harder to handicap than usual. It could also make the next cabinet less unified, making reforms more difficult to pass. That isn’t necessarily a bad thing, in our view, given all the market-orientated reforms passed over the past decade, but if investors have high hopes, this could be a rare case where gridlock proves disappointing rather than a means of reducing legislative uncertainty. However it shakes out, though, we think investors’ simply getting clarity will likely add some tailwinds. So, keep watching this space.

Portuguese Voters Pick Gridlock

Portugal voted over the weekend, and whilst the results are still trickling in pending the counting of expats’ ballots, it seems safe to say the contest yielded a hung parliament. The centre-right Social Democratic Party’s Democratic Alliance won a plurality of 79 seats in the 230-seat lower house, followed by the centre-left Socialist Party at 77.^[iv] The big winner, per many headlines we encountered, was the right-wing Chega—an upstart populist group—at 48 seats.^[v] This resurrected long-running warnings from commentators we follow about European populist parties potentially upending the traditional order and fraying EU integration, along with a host of sociological chatter that—as always—we think is beside the point for investors.

From here, it won’t shock us if the government formation process is slow and clunky. Whilst the Social Democrats have some ideological overlap with Chega, leader Luis Montenegro has ruled out a coalition with the populists.^[vi] However, Chega has already started abandoning some of its more contentious proposals, presumably in hope of becoming a palatable formal partner, so a majority coalition may not be entirely off the table.^[vii] A looser alliance is also possible, perhaps with Chega agreeing to prop up a minority centre-right government in confidence votes and key legislation. And, as happened in Spain, there remains an outside chance the centre-left could corral enough small parties to make a go of it, though given voters’ backlash against the scandal that fomented the outgoing Socialist government’s collapse, this seems unlikely to us.

However this goes, we think the result is likely deep gridlock. We find coalitions, even when the parties have ideological alignment, rarely get much done. There often appears to be too much internal competition, and some lawmakers are loath to alienate supporters by caving on pet policies. Even a couple of holdouts can be enough to stop legislation if the government’s majority is slim enough. Minority governments also tend to be pretty do-nothing, based on our analysis, as legislation generally has to be as bland as possible to get the necessary opposition votes.

For Portuguese stocks, we think this is a fine outcome. The country passed several market-orientated reforms during last decade’s eurozone debt crisis, modernising labour markets and other parts of the economy. A gridlocked government might not add to these, but it also probably can’t undo them—and would thus merely extend the past few years’ status quo. So for all the noise emerging from the election, we think policy clarity is the real prize and one stocks are likely to be fine with.

Spain’s Government Presses Pause

Speaking of gridlock, Spain is providing a textbook example. When last we checked in, the government’s amnesty deal for Catalan separatists had hit the skids after the leading separatist party, Junts, argued it didn’t go far enough to ensure its members’ freedom. At the time, it looked iffy as to whether Prime Minister Pedro Sánchez would be able to win support for a modified deal from his other coalition partners, as amnesty has proven very unpopular with the general public. But he did, and it passed the lower house Thursday.

That theoretically should have cleared the way for Sánchez to focus on the budget, the next item on the agenda and usually flagship legislation annually. But the separatists threw a wrench in his plans, using their newfound freedom to call a snap election in the Catalan regional government. They set the contest for 12 May, which looks to be around when the Senate will vote on the amnesty bill—leading many commentators we follow to predict exiled members will campaign from outside the country, then return home to take office once they receive their freedom.

This has ground national lawmaking to a halt, with 2024’s budget the first casualty. Instead of pursuing new fiscal policy, Sánchez will roll over 2023’s budget and target 2025 for bigger changes.^[viii] So for the time being, Spain gets the fiscal status quo, but we think the move also extends some uncertainty—namely over windfall taxes on banks and the energy sector. Making these (currently temporary) taxes permanent was part of the government’s coalition agreement, but that seems to be in question now.

Whilst the extended uncertainty isn’t great for markets, in our view, we doubt this is a big deal for Spanish stocks’ returns either way. The taxes may be a headwind to the affected companies’ profitability, but we think they are a well-known one at this point, and they haven’t stopped Spain from outperforming European and global stocks by a country mile since global stocks began recovering in earnest from 2022’s downturn.^[ix] Whether or not the taxes become permanent in 2025, we doubt they suddenly become bearish. Rather, we think markets will probably benefit from simply getting some clarity either way.