By Pictet AM

“The match. This is the official campaign slogan of the ruling Liberal Democratic Party (LDP) for the election of Japan’s next Prime Minister. The incumbent, Fumio Kishida, has decided not to seek re-election. According to local TV station FNN, the election is due to take place on September 27 – to be confirmed. Several candidates are in the running, but only one is making a strong showing. It’s Shinjirō Koizumi – short-lived Minister of the Environment (2019-2020), current Member of Parliament and member of a dynasty of Japanese politicians. He is the son of former Prime Minister Junichirō Koizumi (2001-2006). His main assets: he’s young (43), he’s a new face in Japanese politics and he has the support of former Prime Minister Yoshihide Suga (2020-2021), who still wields considerable influence within the LDP. According to a poll published by the Nikkei daily on August 23, he has 23% of the population in favour – far ahead of the other candidates. Within the LDP, his popularity is high, with support rising to 32% according to the same poll. He therefore has every chance of winning in a few weeks’ time.

Should we expect a change in policy?

Not really. Koizumi, like the other leading candidates, is arguing for further normalization of monetary policy now that wage increases are beginning to spread through the economy, supporting consumption and creating inflation. The Bank of Japan (BoJ) is due to meet at the end of the month. It is unlikely to act again. However, a rate hike is almost certain for the fourth quarter.

For the record, at the end of August, the opposition demanded a special hearing of the BoJ governor before the Japanese parliament to discuss the decision to raise rates. Parliamentarians spent at least five full minutes questioning the Governor about the recent rice shortage – a subject over which the Governor has no control. This underlines the fact that the quality of political staff is pretty much the same everywhere…

Outlook

August unemployment, due this Friday, will be one of the last major US statistics before the Fed’s FOMC meeting on September 17-18. There has been a lot of comment over the past month about the downward revision of job creation for the year ending March 2024 (-818,000). Analysts have been quick to assert that the Fed is behind the economic cycle and should have cut rates earlier. According to them, this would validate the hypothesis of a 50 basis point drop in the cost of money this month, as opposed to the 25 basis points forecast by the Bloomberg consensus.

In our opinion, this is a false reading. Anyone who follows the American labor market knows that employment figures are subject to major revisions. This has always been the case. A drop in job creation of 800,000 compared with the first estimate may seem significant. In reality, it’s not that significant compared with previous years. Finally, this figure should not be over-interpreted, since the final estimate, which may differ from the recently published one, will not be released untilFebruary 2025. In conclusion, this is unlikely to have much influence on the FOMC’s decision. We are still expecting rates to fall by 25 basis points this month.