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JUL. 30, 2021

Much more than just Games

Despite the direct impact on the Japan’s economy of hosting the Olympics with a limited audience may not be huge, investors still see important implications for politics and markets.

A general election, which occurs every four years (or when the prime minister dissolves the cabinet), is due to take place from September to early October 2021, while a representative election within the ruling party will happen soon after. Prime Minister Yoshihide Suga is expected to use the potential success of the Olympics as a boost to his approval rating, which has hit a low of around 35-40%, versus around 60% when he established the cabinet in September 2020.

However, Tokyo is currently under its fourth state of emergency, exceeding this week the earlier record of daily Covid-19 cases. The pace of vaccinations has rapidly accelerated since May and will be a key factor in Japan’s economic normalization in 2H21. The ratio of the population vaccinated with at least one dose reached 38% as of July 29th, and the weekly pace is currently around 4% of the population. If the current pace continues, a 50% vaccination ratio will be achieved by the end of September. Should there be organizational problems or an additional sharp rise in cases, Suga's approval rating may instead drop further just before the general election.

Latest polls see the ruling Liberal Democratic Party (LDP) to keep its majority in parliament, as its support count is still high enough. Moreover, Suga’s approval rating is likely to improve along with the reopening of the economy. If the LDP holds half the seats in the lower house following the general election, Suga is then likely to win the party’s representative election.

The government is also expected to announce a supplementary budget of JPY 10-30tr (2%-5% of GDP) to support the economic recovery, possibly before the end of its mandate. Based on the cabinet’s new growth strategy announced on June 18th, in the supplementary budget the government will focus on green economy, digitalization, revitalizing the local economy and reform country’s childcare.

As for market implications, the successful management of the Olympics would likely boost foreign investor sentiment on the back of hopes that this will prompt the normalization of Japan’s economy. Japanese people hold excess savings of around JPY 35tr (6% of GDP) and investors believe this will boost spending on services after the reopening. Although mobility hasn’t started to improve and state of emergency restrictions are intensifying, market expects private consumption and corporate activities to rebound in 2H21. Thus, themes of interest remain re-opening sectors and actual development of fiscal policies.

We thank you for the continued support.

The FAM team