Fisher Investments Editorial Staff
Others

The Land of the Revolving Door

By, 06/02/2010

Story Highlights: 

  • Yukio Hatoyama, whose approval ratings have been declining for months, now joins the long list of former prime ministers of Japan.
  • Right now, all signs point towards the likely case of political gridlock in Japan, generally a good thing for stocks, which dislike legislative surprises.
  • The resignation of the embattled Hatoyama may or may not add some uncertainty for Japanese stocks in the near term but should have little net impact for global shares.

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Markets started down and ended down Tuesday. But amazingly, stocks charged back early and for much of the day traded sideways. Late in the day, however, fears regarding ratcheting tensions in the Middle East and the seemingly unstoppable oil spill in the Gulf won, and stocks tumbled again. Day to day, there's no accounting for what stocks will do. Our view is this is simply more of the black sentiment that's been inflicting stocks of late. And, though painful, characteristic of a sentiment-fueled bull market correction—read more here, here, and here.

With so much attention on the Gulf and PIIGS lately, it's easy to overlook our friends further East. Yukio Hatoyama, whose approval ratings have been declining for months, now joins the long list of former prime ministers of Japan. Hatoyama's problems came to a head recently over plans to relocate the US Futenma military base from Okinawa, Hatoyama dismissed Mizuho Fukushima, head of the Social Democratic Party (SDP) and part of Hatoyama's ruling coalition. The SDP supported the move, and Hatoyama pledged to be pro-move as well. However, Hatoyama then reversed himself and struck a deal with the US that means little (if anything) will be leaving any time soon. Politicians, being politicians.

In response, the SDP not only quit the once three-party coalition, but appeared to be teaming up with the opposition, leaving Hatoyama and the DPJ much weakened. The ruling coalition still has a firm majority in the lower house but, with the SDP's defection, are now even further from the two-thirds majority necessary to override the upper house. The SDP went as far as saying it would work with the opposition to submit a no-confidence motion against Hatoyama—which now, of course, is unnecessary. Typically, so much political turmoil is a stock market negative—at least for the home country. But Hatoyama's resignation is not a new phenomenon in Japan.

Prime ministership has traditionally been a revolving door in Japan. Since 2006, Japan has seen five prime ministers: Koizumi (2001-2006), Abe (2006-2007), Fukuda (2007-2008), Aso (2008-2009), and now Hatoyama (2009-2010). Aside from the very popular Junichiro Koizumi (2001-2006), prime ministers in Japan generally don't enjoy a long tenure. 

To counter the argument that Japan's recent lackluster performance is due to political uncertainty, the 1980s offer a historical perspective on the ramifications for Japanese and global stocks now that Hatoyama is out.  In the 1980's, a time when the Japanese economy and stock market was the envy of the world, Japan employed more than five prime ministers. In fact, Japanese markets responded nonchalantly to Hatoyama's resignation.

Right now all signs point towards the likely case of political gridlock in Japan, generally a good thing for stocks, which dislike legislative surprises. A small caveat: Japan could do with some free market reform, and if the ruling party (or parties) were headed that way, we'd say gridlock wasn't great. But since all signs point to the ruling coalition not being grand free-market reformers, some gridlock would be good.

Prime Minister turnover is the norm, not the exception, in Japan. The resignation of the embattled (dare we say archetypical politician?) Hatoyama may or may not add some uncertainty for Japanese stocks in the near term but should have little net impact for global shares. There will be stock market volatility in the coming months as the global recovery gains a firmer foothold—normal for any newish bull market. But it won't be because the Land of the Revolving Door has a new PM. 

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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