Recent political developments in Japan have caught the attention of markets, especially the rapid decline in Prime Minister Shinzo Abe’s approval rating.
This chart from Nomura shows the recent fall, and includes the approval ratings of the current government’s two main competitors:
Given the recent slump, Nomura’s currency strategists have considered the likelihood of a scenario in which Abe resigns early from office.
They said that if Abe does resign, the timing of when when he does is the key factor in terms of the effect on Japanese financial markets.
“If Prime Minister Abe resigns early, before the next Bank of Japan governor is appointed, the resignation could have a sustained negative impact on Japanese equity and yen-crosses,” the analysts said.
The current BoJ governor is scheduled to retire in April next year, and a replacement will likely be nominated at the end of this year.
The Nomura analysts said that as long as Abe is still in power until after that, the Bank of Japan is unlikely to change its ultra-easy stance on monetary policy.
However, Nomura said that if Abe steps down early it would raise the likelihood that the BoJ would return to a more hawkish stance. That would lead to a significant appreciation in the Japanese yen from its current levels.
It would likely lead to a negative flow-on effect on Japan’s Nikkei stock index. Japanese stocks typically track inversely to the yen as the index is comprised of companies that operate in big exporter industries.
But the analysts argued that an early resignation by Abe is more of a tail-risk event, citing three key factors:
1. Opposition parties are still divided: The chart above shows that while the popularity of Abe’s ruling LDP party is plummeting, approval ratings for its largest opponent the Democratic Party also slipped. Last week the leader of the Democratic Party, Ms Renho, stepped down, and the analysts said that her replacement may look to build consolidation among Abe’s political opponents.
“Weak and fragmented opposition parties are a key reason behind the prolonged power of the Abe cabinet, so the new DP leader’s stance on possible consolidation among opposition parties will likely be important in the medium term,” Nomura said.
2. Abe has a solid base: The analysts said that Prime Minister Abe is still well supported within his own party. They noted a recent survey which showed that among respondents who support Abe’s LDP party, 47.1% still think Abe is the most appropriate choice as leader.
3. Quiet election year: Despite low approval ratings, there’s no major activity scheduled for 2017 on the Japanese election calendar. Two major elections – the LDP leadership ballot and the general election – don’t have to be called until September and December next year respectively
“By postponing a snap election to later next year, the Abe cabinet could attempt to recover its popularity via further economic stimulus, which would likely involves another delay in the consumption tax hike,” the analysts said.
This table shows the timeline through to the end of next year on the Japanese political calendar.