TOKYO -- Japanese stocks jumped on Friday afternoon, boosted by Prime Minister Yoshihide Suga's decision to not run in the upcoming election for the presidency of the ruling LDP, with investors hopeful of a turnaround in the government's handling of the pandemic.
An increase in expectations for economic packages also boosted investors' risk appetite.
Japan's blue-chip Nikkei Stock Average rose sharply in afternoon trade, at one point rising over 600 points, or 2%, before closing at its highest level in over two months. The broader Topix index soared to a 30-year high, while Nikkei futures also climbed.
On Friday, Suga announced that he will resign this month rather than run for reelection as Liberal Democratic Party president.
The prime minister took office a year ago. His support rate went on a near-constant decline as criticism mounted over his handling of the coronavirus pandemic. According to Kyodo News, Suga's Cabinet approval rating last month plumbed to a record low of 31.8%.
Takahide Kiuchi, an executive economist at the Nomura Research Institute, said investors engaged in some risk-taking in Tokyo on Friday "due to the expectation that Suga's resignation will lead to more effective pandemic control measures."
Some market participants had feared for a turbulent election season as Suga's declining approval rating raised the risks of a defeat for the LDP in the upcoming general election. The LDP has only been out of power twice since it was founded in 1955.
Suga's decision to resign relieved investors of that concern.
In Tokyo, over 90% of the 225 companies comprising the Nikkei index advanced. Among the biggest gainers were shares in cyclical industries like iron and steel, airlines, and services.
With Suga now out of the picture, contenders for the LDP presidential election include Fumio Kishida, a former foreign minister, and ex-Internal Affairs Minister Sanae Takaichi.
Kishida has indicated that an economic stimulus package worth "tens of trillions of yen (hundreds of billions of dollars)" would be necessary in Japan's battle against the pandemic.
Takuji Aida, a chief economist at Okasan Securities in Tokyo, predicts that Kishida, who has also vowed to reduce income gaps and support citizens who are economically vulnerable, "has a high probability of winning the LDP presidential election at the moment."
Going forward, other contenders are likely to come out with their own economic recovery plans, with the political forecast already providing a tailwind to the stock market.
Meanwhile, the Japanese yen remained unchanged overall. The yen weakened slightly against the U.S. dollar after news of Suga's resignation broke but soon returned to dull trading as investors await the release of U.S. employment data later Friday.
Naoki Kamiyama, a chief strategist at Nikko Asset Management, notes that foreign investors who are sensitive to macro developments "may try to hold active positions in stock futures if a new government with strong leadership and policy implementation capabilities emerges." "Not only the LDP presidential race but the outcome of the general elections may also further boost Japanese stocks."