Sayonara, Abe-San

Japan’s Prime Minister Shinzo Abe unexpectedly announced his resignation last Friday, citing health issues. He will stay on in a caretaker capacity until his Liberal Democratic Party (LDP) selects a new party leader, who will presumably serve out the rest of Abe’s term as party leader, which was set to expire in September 2021. Headlines have already begun discussing Abe’s legacy, including what he was and wasn’t able to accomplish. In our view, Abe’s tenure is a reminder that one politician, regardless of popularity, typically can’t enact major changes singlehandedly—for better or worse.

Perhaps Abe’s most impressive achievement was bringing stability to the Japanese premiership, notoriously a revolving door following the departure of reform champion Junichiro Koizumi in 2006. Abe was his initial successor but stepped down a year later, citing ulcerative colitis—the same health condition sidelining him now. Japan then cycled through five more prime ministers before Abe returned in 2012. The man we affectionately called Japan’s Grover Cleveland would eventually become the Japanese prime minister with the longest consecutive tenure on record.   

Exhibit 1: Japan’s Prime Ministers in the 21^st Century

Source: Fisher Investments Research, as of 8/28/2020.

Despite several scandals, including a 2017 land sale controversy, Abe won three consecutive landslide general elections—a testament to his popularity (and the opposition’s weakness). While most recent coverage dissects his political legacy, our focus is on his economic record. Internationally, Abe was a rare free-trade champion in a historically protectionist country, brokering deals like the Japan-EU Economic Partnership Agreement—the world’s biggest bilateral trade deal—and joining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). Japan is also rounding third on a free-trade deal with a post-Brexit UK. Yet from a domestic economic perspective, Abe’s record is mixed.

When Abe began his second round as prime minister in December 2012, many observers were excited about his three-pronged economic revitalization plan, dubbed “Abenomics.” In reference to an old folk tale, he dubbed these prongs the “three arrows” he planned to fire at Japan’s longstanding economic issues. The first two arrows were monetary and fiscal stimulus, which the central bank and government unleashed immediately. First was a ¥10.3 trillion ($117 billion) fiscal stimulus package in January 2013, followed by a quantitative easing (QE) program the size of Mt. Fuji the next month. Japanese QE eventually became the world’s largest when measured by the central bank’s asset holdings compared to GDP.^[i] Yet lackluster private sector and loan growth show these two arrows were ineffectual at best—counterproductive at worst.

Critically, the “third arrow” of economic and structural reforms never hit the target proponents hoped for—though Abe won some minor victories. He persuaded the powerful agriculture industry to make some concessions in Japan’s trade deals. He implemented some corporate governance reforms and cut the corporate tax rate from 35% to just under 30%, which was a net benefit, but it fell short of his stated plans to bring it down “into the 20s” permanently.^[ii] On the labor front, the Abe administration passed an immigration law to attract foreign workers and made progress in getting more women into the workforce.

Yet these efforts fell short of the deeper, politically contentious changes capable of freeing up a long-stagnant economy. Vested interests remain powerful, and reform progress is painfully slow and incremental. The keiretsu—large conglomerates connected by a cross-shareholding system that props up flagging businesses and discourages creative destruction—still dominate Japan, Inc. The powerful business lobby known as keidanren still wields heavy influence and control over wages, making it harder for startups to compete. Lifetime employment and the culture of long work hours remains intact, hurting hiring and productivity. We will never truly know if Abe had the political capital to push more meaningful economic reforms, as he spent much of his clout on efforts to amend Japan’s pacifist constitution—a lifelong ambition. Despite some minor changes (e.g., passing laws that allowed Japan’s Self-Defense Forces to fight alongside allies) Abe couldn’t overcome public resistance against changing Article 9 of Japan’s constitution, which prohibits a standing army and renounces the sovereign right to warfare.

With Abe’s stepping down, the LDP must decide whether to hold a full leadership election—which allows regional party officials to vote—or a quick vote among parliamentarians due to COVID-19. Under a full election, experts peg former defense minister Shigeru Ishiba as the favorite. Ishiba is an outspoken Abe critic and enjoys the strongest public poll numbers, though he is also unpopular among LDP kingmakers. In a quick parliamentarian vote, some believe Chief Cabinet Secretary Yoshihide Suga has an edge since he is considered the least objectionable candidate. Other candidates include former foreign minister and LDP policy chief Fumio Kishida and Defense Minister Taro Kono.

Whomever the LDP chooses, the winner will likely serve the final year of Abe’s term as party president and probably won’t deviate hugely from Abe’s works-in-progress (Article 9 aside) as prime minister. Whether they will win leadership reelection in a year and fight the next general election (due by October 2021), we won’t hazard a guess. It likely depends on how hungry up-and-comers like Shinjiro Koizumi (current Minister of the Environment and son of the reform-minded Junichiro Koizumi) are and whether the party wants to undertake a full-scale generational refresh while its opposition is still weak.

From a market perspective, Abe’s resignation doesn’t materially change Japan’s political drivers. Abe wasn’t likely to get much done during the rest of his term, as recent political scandals and COVID-19 have consumed his administration’s attention lately. He also already announced his present term as LDP leader would be his last. Effectively, Abe is just sitting out his lame-duck year. However, we think his tenure provides some important lessons for investors. For all of Abe’s popularity and clout, he struggled to pass major changes. It is unlikely to be different for the next LDP leader. Abe’s time as prime minister shows politicians’ limitations—and why we believe investors should focus on policies and actions, not personalities and promises, when considering politics’ market impact.

H/T Fisher Investments Research Analyst Davis Zhao