Investors fear talk of taxes in Kishida’s ‘new capitalism’

Fumio Kishida’s first speech to the Diet as Japan’s 100th prime minister was an impassioned performance compared to his staid predecessor, but it did little to relieve investor concerns that his talk of redistribution and higher taxes are bad news for stocks.

Kishida’s “new form of Japanese capitalism” made up the bulk of his speech, in which he repeated campaign pledges to redistribute wealth and narrow the gap between rich and poor. His policies have begun to ring alarm bells among some investors in Tokyo, where the 225-issue Nikkei average earlier this week fell for eight days in a row, its worst streak since 2009.

The Nikkei daily reported on Thursday that discussions for raising investment income tax, levied on dividends and the sale of shares, would be included in the tax revision plans for the next fiscal year starting April, earlier than many anticipated.

“This would be a disappointing development for the equity market,” Masatoshi Kikuchi, chief equity strategist at Mizuho Securities, wrote in a note on Thursday. “We thought discussions would begin at the end of next year, after the Upper House election.”

“Kishida Shock” was the talk of morning TV shows in Tokyo this week after the Nikkei 225’s plunge. Kishida has pushed back against neoliberal policies, decrying what he sees as the “splitting” of public unity and the widening gap between rich and poor.

The 225-issue Nikkei average earlier this week fell for eight days in a row, its worst streak since 2009. | REUTERS

He hearkens back to an era when more than 90% of the Japanese public considered themselves middle class, and are a far cry both from the reformist tendencies of Taro Kono, who he defeated in the race for ruling party leader, and former Prime Minister Shinzo Abe.

“If you want to go fast, go alone. If you want to go far, go together,” he told lawmakers on Friday, drawing on a supposed African proverb made famous by former U.S. Vice President Al Gore. Market reaction was tepid, however, with the Nikkei 225 paring earlier gains of as much as 2.3% during his speech to close 1.3% higher, though still down for the week.

“He hasn’t said much that’d be good for Japanese stocks,” said Tetsuo Seshimo, a fund manager at Saison Asset Management Co. “There’s a lot of talk that sounds like things are going back to the ‘old Japan’ — that includes talk about raising taxes.”

Mizuho’s Kikuchi cited four other “key concerns” among investors surrounding Kishida’s policies, other than his capital gains tax idea:

  • Policies might be “too liberal”
  • They don’t take the stock market into account
  • Corporate governance reform could slow
  • Foreign investment might be restricted due to his emphasizing of economic security

Nonetheless, it’s not all bad news for equities. Many expect that the Oct. 31 general election can be a catalyst for a rebound, while COVID-19 cases have plunged with vaccination rates overtaking early starters such as Israel and the U.K.

“Stocks are unlikely to keep falling like this,” said Shogo Maekawa, a strategist at JP Morgan Asset Management. “I expect the market to have another go at rebounding toward the end of the year.”

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