Assessing the impact of Japan PM Kishida’s resignation on markets

Prime Minister Fumio Kishida’s decision not to run for president of the Liberal Democratic Party (LDP) in the next party election and step down next month has prompted some speculation about its potential impact on the stock market.

According to UBS analysts, the immediate market reaction is expected to be muted as long as the LDP remains in power, with no major ideological shifts anticipated.

However, UBS highlights that the nuances of fiscal and monetary policies, as well as structural reforms and energy policies under a new LDP leader, could influence market sentiment.

“There are likely to be differences in fiscal and monetary policy stances and structural reform and energy policy priorities that are likely to attract attention in the stock market,” UBS notes, indicating that investors will closely watch the policy directions of potential successors.

The leadership transition will culminate in a presidential election for the LDP, likely between September 20 and 29. Media reports suggest that candidates like Shigeru Ishiba, Shinjiro Koizumi, and Sanae Takaichi could be contenders, but no clear frontrunner has emerged yet.

UBS also points out that if the LDP’s approval ratings improve post-election, the House of Representatives could potentially be dissolved (as has happened in the past), paving the way for a general election in the autumn.

Historically, stock prices have tended to rise during dissolution and general election phases, offering a potential opportunity for investors. However, UBS cautions that it remains uncertain whether a general election will boost confidence in government policies or exacerbate concerns about political instability.

Overall, UBS believes that while Kishida’s resignation introduces some uncertainties, the overall impact on markets may depend on the new leader’s policy direction and the broader political environment.