Worrying About an Ailing Premier

Keizo Obuchi
Photo credit: Reuters

TOKYO -- Without a crystal ball, it's anybody's guess how Japan's financial markets will react as Prime Minister Keizo Obuchi lays in the hospital after suffering a stroke Sunday.

On Monday, the Nikkei 225 index climbed 1.9% and the Topix, which includes all shares listed on the Tokyo Stock Exchange's first section, rose 1.6%. That was before acting premier and current Chief Cabinet Minister Mikio Aoki confirmed to reporters after the market closed that Obuchi slipped into a coma late Sunday.

The premier has been under immense pressure over the past few months: A string of political scandals that led to the sacking of three Cabinet members has sapped his popularity, the economic recovery seems less sure than earlier and widespread police corruption has tarnished the saintly image of a "safe" Japan. A volcanic eruption on the northernmost island of Hokkaido has not helped matters.

Worst of all, Obuchi's already unpopular three-way political coalition between the Liberal Democratic, Liberal and New Komei parties is falling apart. Local reports say the premier had been extremely restless over the weekend as he met with party officials to try to staple back together what was left of the coalition. Obuchi needs the other two parties; without them, the LDP cannot win a majority in the Lower House when elections are called before October. If he loses his coalition partners, officials will call for a snap election, which he had wanted to avoid until after the July Group of Eight summit in Okinawa.

The long-term implications of Obuchi's hospitalization are unknown but could put a damper on Japanese equities just as key economic data, such as the Bank of Japan's quarterly sentiment report, the tankan, which was released Monday, are showing signs of economic improvement. If the premier remains ill, snap elections will be forced, which will lead a new prime minister.

If the new leader is reform-minded like Obuchi, then it should be business as usual for equities. Front-runners include Secretary General Yoshiro Mori, Foreign Minister Yoehi Kono and Shizuka Kamei, the head of the LDP's Policy Affairs Council. These officials would not stray too far from Obuchi's reform programs.

The ticking bomb is Koichi Kato, former LDP policy chief and an individual who has no defining role within the party at the moment. Kato, who ran against Obuchi during the last elections, has major aspirations to become prime minister and is a fiscal conservative. He may suggest backtracking on many restructuring programs to win votes from wary workers who are frightened of losing their jobs.

Unfortunately, one of the major reasons foreign investors came back to invest in Japan last year is that Japan Inc. was finally restructuring, according to Peter Morgan, economist at HSBC Securities. "Given that the (LDP) would probably want to continue the current stance on fiscal policy, particularly in view of the upcoming Lower House election, it is unlikely the LDP will select someone like Kato, but this is by no means guaranteed," he says.

If you mix politics into the tech beating going on right now, things look like they could get a little rough. However, investors knew Obuchi was hospitalized Sunday and the buyers were still out there Monday, scarfing up shares after the tankan showed companies are feeling more optimistic about the future. Fund managers are only beginning to spend and build up their portfolios as the new fiscal year begins, and money continues to pour into newly created mutual funds. That, at least in the short term, looks like it's going to provide a much-needed cushion for Japanese equities in a time of political uncertainty.