Stocks fall on Abe’s decision to step down

by and

Stock prices closed lower Wednesday following Prime Minister Shinzo Abe’s surprise announcement of his decision to resign.

The political doubt his decision raises, analysts say, adds to the sense of economic uncertainty in Japan and may delay a central bank decision to hike rates.

At a hastily arranged news conference in the afternoon, Abe said he would resign due to plunging public support and to take responsibility for causing confusion in national politics.

The crushing defeat suffered by the Liberal Democratic Party and coalition partner New Komeito in the July 29 Upper House election left the opposition Democratic Party of Japan the No. 1 party in the upper chamber.

The benchmark Nikkei average rose above the 16,000 line immediately after media first reported Abe’s intention to resign at around 1 p.m., but by 3 p.m. it had lost 80.07 points from Tuesday to close at 15,797.60. The broader Topix index, which includes all shares on the TSE’s first section, closed at 1,528.27 points, down 4.12 points.

“Because we don’t know who will succeed Abe and what policy the new prime minister will have, the political uncertainties pushed share prices down,” said Shinichi Ichikawa, a strategist at Credit Suisse First Boston Securities Ltd. in Tokyo.

Japanese stocks have continued to gyrate wildly since late July amid uncertainties over the U.S. economy triggered by the subprime mortgage crisis.

The Nikkei slumped to a year-to-date low of 15,273 on Aug. 17 but recovered later in the month to pass the 16,000 level, where it has hovered.

Koichiro Nishio, a market analyst at Nikko Cordial Securities Inc., said the political turmoil, coupled with worries over the U.S. economy, may cause another plunge in the market.

“With Abe’s resignation, the government’s reforms may stall, which will definitely be a negative factor for foreign investors,” Nishio said, adding these factors will continue to affect sentiment no matter who replaces Abe.

But Credit Suisse’s Ichikawa said Abe’s resignation is only one factor determining share prices, and thus its effect should not be overestimated.

“I think the Nikkei average will hover for another one to two months but will gradually recover to the 17,000 level by yearend,” Ichikawa said, adding he expects a likely reduction in interest rates in the U.S. in the near future to calm the subprime mortgage problem.

On the economic policy front, some observers say the next prime minister is likely to follow the path laid out by Abe after the Upper House election defeat, namely shifting the government’s priority to revitalizing rural regions and helping the weaker members of society.

“It is difficult to secure resources to help those in need just by cutting spending, so a tax hike naturally becomes the solution,” said Koichi Haji, chief economist at private think tank NLI Research Institute.

But that does not mean boosting the budget for public works projects as the LDP has done in the past, he said.

“Shifting away from the current structural reform policy would negatively affect the economy,” Haji said.

But Hideo Kumano, chief economist at private think tank Dai-ichi Life Research Institute, said it all depends on which party takes the helm.

It is still unclear whether Abe will be replaced with another LDP executive or a general election will be called, opening the door to the prime ministership for opposition leader Ichiro Ozawa, Kumano said.

“Abe was defeated in the Upper House election. It means his policies have been rejected,” said Kumano, adding that current policies will be reviewed under the next prime minister.

Kumano also said Abe’s resignation will likely cause the Bank of Japan’s Policy Board to postpone raising the benchmark interest rate from the current 0.5 percent.

“Even without Abe’s resignation, the BOJ’s rate hike wasn’t expected until October at the earliest” due to an anticipated move by the U.S. Federal Reserve to lower interest rates, Kumano said.

“Now that the political environment has become uncertain, it may be pushed back to a later date,” he said.

Mitarai reacts

Staff report

A top business leader praised Prime Minister Shinzo Abe following his announcement to step down Wednesday but expressed dismay at the timing of the move.

“I have never heard of anything like that in the business world,” said Fujio Mitarai, chairman of the Japan Business Federation (Nippon Keidanren), the nation’s most influential business lobby. “But business and politics are different.”

Speaking to reporters in Tokyo, Mitarai praised Abe for visiting China and South Korea soon after he took office last September, mending ties with the two key neighboring countries.

“But he lacked the effort and time to gain the understanding of the people,” Mitarai said. “I wanted him to continue his work.”

He said it is regrettable that the nation will temporarily face a political vacuum.