Japan Election Campaign Promises Include Potential Market Players

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Japanese Prime Minister Fumio Kishida may have witnessed the harsh reality of investor reaction when his suggestion of higher capital gains tax rates apparently lowered Japanese stocks soon after his election. as president of the ruling party last month.

As the House of Representatives elections approach in late October, ruling and opposition parties in Japan are making campaign promises that, if materialized, could have ramifications for financial markets as well.

Some items are more achievable than others because they are already in progress. But there are also ambitious ideas that experts find difficult to achieve.

One of the most controversial is the review of the requirement for Japanese companies to publish quarterly earnings reports.

In his first political speech in parliament, Kishida, who became prime minister on October 4, brought up the idea as part of his efforts to focus on redistribution – the key theme of his goal of creating a new form of capitalism. .

The Kishida-led Liberal Democratic Party also included this pledge in its election platform.

Behind the call lies the idea that companies should be relieved of the time-consuming and resource-consuming task of compiling financial reports every three months and that this practice forces them to focus on chasing short profits. term.

On the other hand, however, the rule change could make it seem like Japan and businesses are taking a step back in terms of information disclosure, experts say.

“For investors, the more information they have, the better,” said Shoichi Tsumuraya, professor at Hitotsubashi University.

Tsumuraya, a finance and accounting expert, said the change will require a review of the country’s relevant law, adding that it is “unrealistic” to do so because he doubts it is an urgent problem.

“Nonetheless, I believe quarterly reporting should be left to individual companies, as they can instead spend more time with shareholders talking about medium and long term plans. “

Japan has been pushing for corporate governance reform since the days of former Prime Minister Shinzo Abe, who was aware of the massive presence of foreign investors in the country’s stock markets.

Its “Abenomics” policy mix, involving bold monetary easing from the Bank of Japan, fiscal stimulus and structural reforms, helped weaken the yen, lift Japanese stocks and boost corporate profits.

Masakazu Tokura, chairman of the Japan Business Federation, said quarterly disclosure is a tool for companies to communicate with shareholders, being cautious.

“A rapid change in the system would cause unwanted confusion in the markets, and we believe that (the matter) needs to be looked at carefully,” Keidanren chief said at a recent press briefing.

Kishida is also seeking to expand what is known as an “university fund” to 10,000 billion yen ($ 88 billion) by the end of March 2023. The fund, which is slated to launch during the fiscal year in progress, aims to strengthen research in universities. with its investment benefits.

Media polls show that the ruling PLD-Komeito coalition is expected to secure a majority of the 465 seats up for grabs in the election, making some commitments more achievable.

Ruling parties support the development of a “green international financial center” in Japan for bonds issued to fight climate change and help achieve carbon neutrality. The Japanese government has already unveiled the idea.

Japan pledged to reduce net carbon dioxide emissions to zero by 2050 when Kishida’s predecessor Yoshihide Suga was prime minister, putting him on par with the United States and Europe.

“It’s not just Japan that needs to work for carbon neutrality and expand sustainable bond markets,” said Takuya Nomura, senior economist at the Japan Research Institute.

“Japan is still in the development phase of a framework… but must take it forward if it is to increase its presence while Hong Kong and Singapore are far ahead,” Nomura said.

Great Britain, Luxembourg, Hong Kong and Singapore are among the top markets for green bonds used to finance environmentally friendly projects. Government support is considered essential to develop something similar in Japan.

Some opposition parties are proposing more drastic ideas in their campaign programs for the election in which they aim to show that they can be a viable alternative to the ruling coalition.

The main opposition party, the Constitutional Democratic Party of Japan, wants to introduce progressive corporate tax rates, which means that the more a business earns, the more tax it has to bear.

The CDPJ is also calling for higher capital gains tax rates, an idea Kishida apparently considered but the LDP did not include in its campaign platform.

The People’s Democratic Party is proposing the idea of ​​“education obligations” to make education free from kindergarten to high school. He plans to secure 50 trillion yen over a decade using bonds, challenging current government spending on education.

The smaller opposition party has also proposed to perpetuate some of the BOJ’s massive holdings of Japanese government bonds in order to reduce debt servicing costs, although Kishida appears to have reservations about this.

The BOJ holds over 40% of Japanese government bonds as part of its aggressive monetary easing, with total government debt twice the size of the economy.

“My goal is to find out whether or how the country’s fiscal position will change,” said Takuya Hoshino, senior economist at the Dai-ichi Life Research Institute.

“There are articles that are particularly intended to attract voters. The increase in capital gains tax may be controversial, but its impact on tax revenue would ultimately only be limited, ”Hoshino said.

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