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‘Asian NATO’ Backer Ishiba to Become Japan PM as Race Jolts Yen
(Bloomberg) -- Japan’s ruling party picked Shigeru Ishiba as its next leader, positioning an advocate of an “Asian NATO” to become prime minister in a surprise result that jolted the yen.
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Ishiba, a 67-year-old party veteran who has served in several senior roles including defense minister, favors ramping up security arrangements in the region, an idea that risks further inflaming tensions with China.
“What do we mean by an Asian NATO? The essence of collective security becomes obligatory,” he said during a post-victory press conference. “The right of collective self-defense is, as the word indicates, a right.”
The Liberal Democratic Party chose Ishiba over Sanae Takaichi, whose signature policies include opposing Bank of Japan rate hikes. Takaichi was favored to win, and the surprise outcome prompted a rally in Japan’s currency as traders foresaw the BOJ staying on course to normalize policy — a campaign that Ishiba has supported.
The yen strengthened more than 1% to as much as 142.8 against the dollar, unwinding several days of declines on speculation over a Takaichi victory. The currency has been closely watched by international investors after a rapid unwind of yen carry trades roiled global markets in early August.
“Clearly, whatever doubts lawmakers had about Ishiba, they overcame them,” said Tobias Harris, the founder of Japan Foresight LLC, a political risk advisory. “Maybe it’s as simple as the fact that they know the broader public supports him.”
Fraying ties with China emerged as a key theme late in the LDP election campaign period after the fatal stabbing earlier this month of a Japanese schoolboy in China. All of the candidates called for a full investigation and demanded steps to protect Japanese citizens.
Tensions have also been inflamed after Chinese military aircraft made an unauthorized entry into Japanese airspace for the first time last month. And this week Japan reportedly sent a Maritime Self-Defense Force warship through the Taiwan Strait for the first time, a move all but certain to anger Beijing.
During the campaign, Ishiba emphasized the need to increase Japan’s defense capabilities and floated the idea of creating an Asian NATO-style collective security agreement to better deter aggression from countries like China and North Korea.
“Ishiba’s main challenge is likely to be foreign policy, so we will have to wait and see how he does in that area,” said Nobuyasu Atago, chief economist at Rakuten Securities Economic Research Institute. “I think that, for the time being, there will be no major shocks in terms of economic policy.”
China has blasted the idea of a security alliance among US partners and allies in Asia. The US has repeatedly said it’s not looking to create a version of NATO in Asia, even as it strengthens alliances to deter China from taking Taiwan and other disputed territory by force.
“A long-term, healthy and stable development of China-Japan relations is in the fundamental interests of the two countries’ peoples,” China foreign ministry spokesman Lin Jan said at a press briefing in Beijing, while declining to comment directly on Ishiba’s victory.
Among Ishiba’s first tasks is the need to strike up a cooperative relationship with the US and whoever succeeds President Joe Biden in the November presidential election. The US is Japan’s only security treaty ally and has its largest permanent foreign military presence in Japan, with around 55,000 troops.
While all of the candidates emphasized the need to keep strengthening the alliance with the US, relations have been put under strain by Biden’s assertion that he would block an attempt by Nippon Steel Corp. to buy United States Steel Corp.
Ishiba has expressed annoyance at claims by US officials that the deal raises security risks.
“What on Earth are the security concerns? We have to make them tell us,” he said earlier this month during the campaign.
Still, Ishiba may have to tread carefully on that issue, as he holds 2,791 shares in Nippon Steel.
While the heightened concern about China fueled by the death of the Japanese schoolboy was seen aiding the hawkish Takaichi to a late surge in the campaign, her insistence on putting the brakes on central bank moves may have made her colleagues reluctant to give her their final backing.
What Bloomberg Economics Says...
“The yen’s surge after Japan’s ruling Liberal Democratic Party picked Shigeru Ishiba to be its next leader speaks volumes about the economic policies he’s likely to take — moving toward a more balanced budget and supporting the Bank of Japan’s move to normalize interest rates.”
— Taro Kimura, economist
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After decades of massive stimulus, the BOJ raised interest rates for the first time in 17 years in March and dismantled its experimental program aimed at sparking inflation. Higher prices have been a source of strong discontent among voters and the prospect of reversing course on the BOJ’s normalization path likely grated with some ruling party members.
“Financial markets have been nervous over the result of the leadership election but now we know the result and that doesn’t indicate a big shift in Japan’s economic policies,” said Seisaku Kameda, a former BOJ chief economist who is currently executive economist at Sompo Institute Plus.
Ishiba has called for more clarity on the BOJ’s plans to normalize policy, and emphasized greater development of regional economies to tackle the depopulation of rural areas, aided by government spending. But in general he has remained supportive of the bank continuing its path away from ultra low rates in contrast to Takaichi who characterized further rate hikes for now as “stupid.”
“While respecting the BOJ’s independence, I hope that through careful discussions authorities will normalize policy at a pace that is in line with the actual economic situation and does not cool the economy,” Ishiba said in his election manifesto.
Ishiba also represents a cleaner face for the LDP as it tries to move on from a funding scandal centered on internal groups or factions within the party. Unlike Takaichi, Ishiba was able to draw on his outsider status to present a more credible sense of renewal in the party’s leadership, a key factor given the likelihood of an early general election.
A record nine candidates contested the election after outgoing Prime Minister Fumio Kishida said he wouldn’t seek a second term. Kishida’s approval ratings had sagged due to the slush-fund scandal and sticky inflation. Ishiba is all but certain to be approved as prime minister by parliament in a vote expected on Oct. 1.
Ishiba will need to steer the nation through a period of transformation as it emerges from three decades of stagnation and faces mounting diplomatic and security challenges.
Signs of a resurgence in the world’s fourth-largest economy have reignited enthusiasm for Japan as a global investment destination. Wages and prices have returned to growth, the stock market is revisiting levels not seen since the 1980s, and the central bank has wound down its unorthodox monetary stimulus program.
But Ishiba will also face persistent deep structural problems, not least an aging and shrinking population, stubbornly low levels of productivity and economic polarization.
“We must make sure that deflation is completely defeated,” Ishiba said at his press conference. “I want to make sure wage growth remains above inflation.”
He also said he wants to coax production back to Japan.
A national election is due sometime in the next year and expected as early as next month. Ishiba said he’d like to consider the best timing for that.
“I want people to be able to make their judgements after we’ve debated opposition party members,” said Ishiba. “At the same time, we also need to be judged soon. I’d like to make a decision on the appropriate timing, thinking about those two factors.”
--With assistance from Yoshiaki Nohara, Toru Fujioka, Yuko Takeo and Jon Herskovitz.
(Updates with comments from press conference)
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