“Any potential change of leadership could cause significant uncertainties for corporations and investors.”

A land-sale scandal that first emerged last year involving Japanese Prime Minister Shinzo Abe and his wife is back in the spotlight. Although it is still premature to tell if the scandal will end Abe’s tenure, the probability has risen notably If more evidence emerges in this scandal, it’s not inconceivable that Abe will be forced out of his position as president of the ruling Liberal Democratic Party (LDP) in the upcoming leadership election in September. This would inevitably end his time as prime minister.

But Abe’s exit would have limited consequences for the direction of Japanese monetary and fiscal policy, in our view.

First, even if Abe loses in the competition for LDP president, parliament would still be majority controlled by the LDP and its ally (Komeito). The key policy agenda should largely be in line with Abenomics.

Second, and likely most crucially for investors, Kuroda has just been confirmed as the governor of the Bank of Japan (BoJ) for a second term, while two new deputy governors have also been appointed. As a result, we don’t think the change of the prime minister will lead to any significant changes in Japan’s monetary policy.

Third, in terms of fiscal policy, we believe the Japanese government will go ahead with the second consumption tax hike in 2019, as promised by Abe during his election campaign last year. Some potential candidates to replace Abe reportedly have a stronger inclination towards fiscal discipline than he does. This probably would just make the consumption tax hike even more likely than currently envisaged, but would not really change market expectations.

So, from a policy perspective, the possibility of Abe’s departure should not mark a big fundamental change for the direction of Japanese policy. However, we also recognise that any potential change of leadership could cause significant uncertainties for corporations and investors. These uncertainties could weigh on both the economy and on financial markets. As a result, Abe’s potential downfall poses a moderate downside risk to the Japanese economy and its capital markets.

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