While anticipation of a new government has already lifted Tokyo stocks to their highest level in 31 years, many analysts think a victory by vaccination minister and pro-reform Taro Kono in the Sept. 29 ruling party leadership election will send share prices even higher.
The 225-issue Nikkei Stock Average has surpassed the 30,000 mark and moved at its highest level since the Japanese economy experienced an asset-inflated bubble, following Prime Minister Yoshihide Suga's decision to resign amid plunging support rates.
The new Liberal Democratic Party leader, to be chosen from among Kono, former Foreign Minister Fumio Kishida, former communications minister Sanae Takaichi and former gender equality minister Seiko Noda, will also be the next prime minister as the party controls the House of Representatives, the more powerful chamber of parliament.
Shares surged even before all contenders announced their bids, mainly because Suga's planned departure reduced risk of the LDP losing a large number of seats in the lower house election scheduled to be held after the party leadership race, brokers said.
Some fear that a loss by the ruling party in the general election could result in uncertainties about political stability and economic packages that the government had worked on to cushion the impact on the economy from the COVID-19 pandemic.
Investors are now buying on hopes of changes with a possible fresh stimulus to be compiled by Suga's successor who many believe will have a higher approval rate, the brokers said.
Many analysts said Kono, who doubles as administrative reform minister, is the market favorite and hopes that his popularity may lead the LDP to win the lower house election. Savvy about social media, the Georgetown University graduate is the No. 1 pick in some media polls.
Meanwhile, expected reactions to a win by Kishida, Takaichi or Noda were mixed.
"The market will likely react most positively with Mr. Kono winning, with his image as a reformist leading to regulatory changes, digital transformation and decarbonizing," said Kenji Abe, chief strategist at Daiwa Securities Co.
In past lower house elections, stocks rose when bold policies were proposed, such as in 2005 on postal privatization bills, and in 2012 when former Prime Minister Shinzo Abe vowed to overcome chronic deflation.
"The market welcomes the idea of drastic change as it raises expectations that the leader can initiate shifts in Japan and lead to growth," Daiwa's Abe said.
"Mr. Kono's popularity also raises hopes that the LDP will increase their seats in the general election and strengthen its power to implement policies."
Abe said investors seem to have started factoring in a Kono win already, citing advances in issues related to renewable energy such as Renova and in electric power companies.
Power companies rose after Kono broke from his long-held stance of opposing the use of nuclear energy, saying it is "realistic" to bring reactors that have been confirmed safe back online to achieve Japan's goal of carbon neutrality by 2050.
Expectations for a stable government, after only a yearlong Suga administration, may attract more foreign investors, who make up about 70 percent of trading value in the Tokyo market.
Yoshinori Ogawa, senior general manager of the Investment Strategy Department at Okasan Securities Co., points out that there is still large room in the market for foreign funds.
Since the "Abenomics" policy mix buoyed the market from late 2012 by featuring aggressive monetary easing, hefty fiscal spending and a growth strategy, foreign investors bought an accumulated total of 20 trillion yen ($182 billion) more in stocks at its peak, according to a calculation by the brokerage.
But the figure has declined since to almost none. "If the new prime minister can propose a reformative path, inflows of medium- to long-term funds can be expected," Ogawa said in an Okasan report.
Although Takaichi has vowed the most reflationary policies among the four, naming her package as "Sanaenomics," pursuing easy-money policies and boosting investment in crisis management including defense capabilities, a win by her may not boost shares as much as a Kono victory, as her right-leaning policies were seen as difficult to attract broad support from the people, analysts said.
Shingo Ide, chief equity strategist at the NLI Research Institute, said Kishida's policy to redistribute wealth to narrow disparities could be interpreted both positively and negatively by the market.
"His policy suggests taxing the wealthy, corporate tax hikes and a pay raise. But expanding the middle class is not bad as it will lead to an increase in domestic demand," Ide said.
Economic policies by Noda, who threw her hat into the ring a day before the start of official campaigning, have yet to be outlined in detail but are expected to be close to those of Kishida, analysts said.
But regardless of her policies, the more complex battle occasioned by her entering the race may have a negative impact on the market, Yoshimasa Maruyama, chief economist at SMBC Nikko Securities Inc., said in a report.
A tight race may make the election "more dependent on factional logic, which would give a backward impression" and will disappoint investors who had hopes of change within the LDP, Maruyama said.
Even as the bullish market is supported by other positive factors such as the COVID-19 inoculation rate topping 50 percent in Japan and expected upbeat corporate earnings led by automakers, some analysts warn of shares rising too far ahead.
"For now, the market seems less concerned with the concreteness or feasibility of each candidate's policy, and is buying anyhow," NLI Research Institute's Ide said, adding that such funds also "run away quickly."
"It's difficult to tell what will be the turning point, but the Nikkei can move both ways -- it can drop below the 30,000 line or rally as high as to 32,000 after the election," he said.