Japan stock investors watched for signs that a deepening scandal would derail Prime Minister Shinzo Abe’s growth policies – and decided, for now, that any fallout would be fleeting.
“It’ll temporarily cap the upside for Japanese equities,” said Soichiro Monji, a general manager at Daiwa SB Investments. “But it isn’t something that will result in throwing stocks into a downward trend.”
After jumping initially yesterday following a strong US jobs report last week, the benchmark Topix index gave up some of its gains on reports – that were later confirmed – that the Finance Ministry admitted altering documents relating to a land sale at the centre of favouritism allegations against Abe.
The measure rebounded in the last hour of trading as Finance Minister Taro Aso refused to step down after it was revealed that his name and that of Abe were removed from the documents.
Amir Anvarzadeh, Singapore-based senior strategist at Asymmetric Advisors, was among those who expected Aso to resign. He said that while the scandal will hurt support for Abe’s government, he remains optimistic about the country’s shares.
“It’s noise, like most things,” Anvarzadeh said. “But underlying fundamentals in Japan are fairly solid even if the yen strength proves some headwind for earnings of multinationals.”
The scandal could further sap foreigners’ appetite for Japanese equities as “political stability plays a big role” for them, said Makoto Hattori, an executive officer at Marusan Securities Co in Tokyo. “Investors are finding it distasteful that the ministry altered documents.”
Foreign investors have been net sellers Japanese shares for eight straight weeks, offloading ¥1.6tn ($15bn) so far this year, according to the latest data from the Tokyo Stock Exchange. Renewed yen strength, with the currency rising to a 16-month high against the dollar, has kept foreigners away.
To Jonathan Allum, a strategist at SMBC Nikko Capital Markets in London, Japanese equities were surprisingly calm given their track record of reacting strongly to political developments. “Perhaps the market has finally come to realise that economics is more important than politics,” he said in an e-mailed response.
More than five shares rose for each that fell on the Topix yesterday, which brushed off the steady stream of revelations about the altered documents to close up 1.5%. The index is down 4.2% in 2018, making it the worst performer among major Asia-Pacific equity markets tracked by Bloomberg.
While the mood was one of nonchalance in the last hour of trading, Allianz Global Investors Japan Co says the scandal is a risk factor for equities. The big question is whether falling approval ratings will cause Abe to step down, said Kazuyuki Terao, chief investment officer at the money manager in Tokyo. Abe’s cabinet approval rating fell 6 points to 45%, according to a Sankei/FNN poll, with most saying Aso should resign over the government doctoring documents pertaining to the land sale.
“If Abe is put in a situation where he can’t help it but quit over dropping ratings, that’ll be a negative for stocks,” Terao said. “We need to watch what happens – without getting too nervous about it.”
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