TOKYO -- Japan's equity market opened with an air of optimism on Monday, despite Prime Minister Shinzo Abe announcing his resignation last week, signaling that investors expect no significant change in the country's economic policy.
Relief swept the market as Chief Cabinet Secretary and Abe's right-hand man, Yoshihide Suga, emerged as a leading candidate to take over Abe's post.
The Nikkei Stock Average opened 1% higher at 23,147. The index continued to climb, at one point over 400 points, or 2%. More than 90% of the company stocks that comprise the index gained. The Nikkei index closed up 257 points, at 23,139.
Also buoying investors was early morning news that Warren Buffett's Berkshire Hathaway had acquired slightly more than 5% of five large Japanese companies.
On Friday, Abe announced that he will step down as prime minister due to health issues related to ulcerative colitis, forcing him to resign for the second time. Abe abruptly ended his first stint as prime minister in 2007.
The Nikkei index tumbled more than 600 points on Friday, or 2.6%, following reports of his resignation last week, as surprised investors scrambled to assess the situation. The benchmark quickly rebounded though, with analysts pointing out that any impact will likely be limited.
"The steady implementation of coronavirus measures is a top priority. This policy will not change no matter who is elected," said Tomo Kinoshita, global market strategist at Invesco Asset Management in Tokyo.
Nikkei has reported that the next prime minister will be elected in a special session of parliament as early as Sept. 17. Suga is considered a pick who can maintain continuity, which eases concerns over another leadership change. In 2007 following Abe's first resignation, Japan went through five prime ministers in just five years until Abe took over again in 2012.
Fumio Matsumoto, chief strategist at Okasan Securities, also said that "If Suga becomes prime minister, there is a possibility that an additional economic stimulus will be implemented relatively early to boost approval ratings, which will be positive for the Japanese market."
After returning to the post of prime minister in 2012, Abe deployed his three arrows of Abenomics, comprised of monetary easing, fiscal spending, and structural reform, including deregulation. The aim was economic recovery in Japan, the world's third-largest economy, after years of mediocre growth.
The policy mix initially prompted foreign investors to pump record amounts of cash into Japanese shares. In 2013, foreign investors purchased a net 15 trillion yen ($142 billion) of Tokyo shares, according to data from the Japan Exchange Group.
But many investors have been pulling out of the market as Abenomics continues to disappoint.
Foreign investors recorded a net sale of Japanese stocks for two consecutive years. Last year they sold nearly 800 billion yen, while in 2018 the amount was 5.7 trillion yen, the biggest net sale since 1987.
Keita Kubota, head of Japanese equities at Neuberger Berman in Tokyo, said that Abe's resignation will likely not cause big disruptions to the market as major policies will remain the same. On the other hand, "It could be good timing to reevaluate the country's growth strategy and deploy new initiatives," he noted.
One of the major results from Abe's first and second arrows of Abenomics was a rising stock market, with the Nikkei index more than doubling to around 23,300 from the time Abe took office.
Bank of Japan Gov. Haruhiko Kuroda was appointed by Abe in 2013, leading to the bank's massive liquidity injections as a part of Abenomics, which helped boost the stock market.
Many market players predict that the BOJ will continue its monetary easing policy, especially as other global central banks like the U.S. Federal Reserve and the European Central Bank expect coordinated action.
The BOJ is also poised to maintain low interest rates and take additional monetary easing steps to support the market amid the coronavirus, with Kuroda likely to stay at the helm until the end of his term in 2023.
On Friday, the yen strengthened more than 1% against the dollar and remains at relatively strong levels on Monday, trading at around 105.4 yen to the dollar.
Last week, the U.S. central bank unveiled a new approach to achieve inflation that averages 2% and leave rates at record lows, a situation that has led investors to sell their dollar.
The yield on benchmark 10-year Japanese government bonds was 0.005% lower at about 0.045% early Monday.
Koichi Sugisaki, a strategist at Morgan Stanley MUFG Securities, claims that the yen will remain as a safe-haven currency and "should continue to be driven by global risk-on/off sentiment rather than domestic catalysts." As investors take advantage of dip-buying, Sugisaki does not expect a meaningful appreciation of the yen. "Given that the BOJ will likely maintain its yield curve control policy, the impact of Abe's resignation on JGB yields will likely be limited," he added.
While Abe's resignation is seen to have little impact on the market, it will be crucial for the new prime minister and his team to restore trust, especially with foreign investors with new growth strategies and structural reforms.
Abe has chaired meetings for the Council on Investments for the Future, as well as the Council on Economic and Fiscal Policy. Invesco's Kinoshita points out that the new administration must continue to "demonstrate a commitment to these reforms."
Tai Hui, chief Asia market strategist at J.P. Morgan Asset Management in Hong Kong, notes that investors are likely to also pay attention to "how the next prime minister would fine-tune the economic reform agenda, especially in boosting the country's productivity amid an unfavorable demographic trend."