TOKYO, Aug. 5, 2024—What triggered the Japanese stock market slide that started in late July and rippled throughout the world Aug. 5 was the Japanese prime minister’s ambitions for reelection in the September election of his ruling political party LDP so that he can continue as the Japanese leader, political insiders analyzed Aug. 5.
As his popular support steadily has been slipping since early 2024, Kishida has been discussing with Seiji Kihara, his closest aide who is a senior LDP lawmaker, strategies to turn it around for Kishida in time for the September Liberal Democratic Party race for its president, which automatically carries with it the post of prime minister because of the LDP’s governing power, they said.
Kishida’s poor popular support – less than 30 percent now – reflects consumer frustrations about stubborn inflation and low wages, as well as employers’ struggles to hire workers, as the country’s population ages and shrinks fast. Consumers also are irritated by floods of foreign tourists visiting not only Kyoto and ancient locations but to what had been preserved for Japanese travelers. Many Japanese consumers view incoming tourists as a key factor in helping fan retail price and hotel and service rate inflation.
So Kishida’s aides targeted the weak yen as a major culprit of inflation. They had instructed the then-vice finance minister for international affairs, Masato Kanda, to buoy the yen against the dollar, which had been fluctuating around 150-160 yen. The Kishida cabinet aides allowed Kanda for massive interventions to stem the dollar’s rise, at the same time, revising formulae for calculating Japan’s government budget primacy balance.
The primary balance – tax revenues minus spending – has been in the red for years but the cabinet office in mid-July announced suddenly that it would turn to a surplus in fiscal 2025. That the account turns to a surplus from years of deficit surprised economists and raised their skepticisms but the Kishida cabinet said it was because spending related to COVID-19 such as vaccines no longer was needed and thus resulted in savings.
Kanda, who had been having difficulty persuading the Ministry of Finance Budget Bureau, which sets annual issuance amounts of Japanese government bonds (JGBs), told the budget bureau that since a budget surplus would be achieved next year, there’s little concern about issuing (selling) new JGBs and that only refunding issuance would be needed – even if the central bank, the Bank of Japan, raised interest rates. The budget bureau could not dispute Kanda’s explanation.
Thus, he laid the ground work for the central bank’s July 31 increase of its policy rate to 0.25 percent from 0.1 percent.
The reaction was immediate and far more than what the Kishida had envisioned. On Aug. 1, the Nikkei average fell 2.5 percent, and the next day, it was down 5.8 percent, the slide that gained impetus on Aug. 5 with a near 13 percent rout, a few days after the Tokyo Stock Exchange’s market capitalization topped the 1,000 trillion yen milestone for the first time since the bursting of the bubble economy in 1992. The three consecutive daily fall wiped out more than 200 trillion yen, the amount that would take several years to recoup.
The Japanese rout is reverberating around the world. On Aug. 2, New York tumbled more than 600 points.
‘It’s all politics,’ one investor with heavy exposures to the Japanese stock market told me angrily.
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