Japan: Ishiba’s victory at LDP election surprised markets, but what would become different?

After today’s Liberal Democratic Party (LDP)’s election, former defense minister Shigeru Ishiba became the new President of the Party. Because the LDP has the absolute majority at the Lower House, he will become the new Prime Minister (PM) of Japan.The foreign exchange market immediately responded to the news with the Yen rapidly appreciating to USDJPY=143 from 146. In fact, he was competing at the second-round election against Sanae Takaichi who openly opposed to Bank of Japan (BoJ)’s rate hike as an avid supporter of Abenomics.On the other hand, Ishiba has already stated that he would carry on Kishida’s framework on economic policies. In fact, he has been in favor of BoJ normalizing the monetary policy. While acknowledging some positive effects, he has been critical that the extraordinary monetary easing scheme lasted for ten years. Moreover, Ishiba kept Kishida’s rhetoric to raise real wages by supporting companies to increase productivity.  On top of these measures, his policies intend to reduce inequality. Ishiba proposed to raise financial income tax for the high net worth and corporate tax. On the other hand, he supports NISA, the tax-free investment scheme for the middle-class, which was developed under PM Kishida. Ishiba also intends to introduce measures to protect subcontractors, which would enable them to transfer higher costs to their contractors. Moreover, Ishiba has advocated to develop regional economies which have been left behind, by promoting digitalization.On national security, the former defense minister proposes to establish an Asian NATO. Ishiba could play a key role on Asia’s geopolitical issues by further strengthening the relationship with the US.All in all, Ishiba’s nomination is unlikely to change Kishida’s economic policies significantly. The BoJ is expected to keep its hawkish rhetoric and to remain vigilant for opportunities to hike. The discussions on tax hike on financial income tax could end up with no definite conclusion as it has been the case with PM Kishida. In fact, it may not even be necessary as the government’s fiscal position has begun to show improvements with rising nominal GDP. The key remains policy measures to lift productivity, which is essential to raise real wages.