TOKYO -- Markets hate uncertainty, the saying goes. But in Japan, stocks appear to be rallying on signs that the country's political establishment may be in for a shake-up.
What has moved the market this week is speculation over the timing of a general election and a revamp of the ruling Liberal Democratic Party's leadership. The country is counting down to both the end of the term for members of the parliament's lower house and a party vote to chose the next LDP leader, now Prime Minister Yoshihide Suga.
For a Tokyo market typically at the mercy of trends in U.S. equities, this makes for a rare domestic driver.
"We had practically no business during July and August, in part because many overseas investors took longer vacations than usual this year," a brokerage representative said, adding that when people returned during this eventful week, "we got a flood of questions about Japanese politics."
The Nikkei Stock Average rose for a fourth straight session Thursday, reaching a six-week high, as Fumio Kishida, a contender to lead the LDP, called for another economic stimulus package. Kishida has vowed to replace longtime LDP kingmaker Toshihiro Nikai as secretary-general.
Speculation that Suga would dissolve the lower house in September for an early election proved shortlived, with the prime minister on Wednesday ruling out such a move.
Yet stocks have glided higher amid all this turbulence. Overseas investors have done most of the buying. UBS Securities Japan and BNP Paribas Securities (Japan) made big purchases of stock index futures Tuesday, while Citigroup Global Markets Japan, Societe Generale Japan and Credit Suisse Securities (Japan) jumped on the bandwagon Wednesday.
Making sense of these moves requires understanding two anomalies involving Japanese market behavior around elections.
One is the rule of thumb that snap elections are correlated with buying. Looking at the 10 early elections held since 1990, stocks rose nearly every time between the day of the lower house being dissolved and the election date. The Nikkei average has a 10-for-10 record, gaining 4.2% on average, while the broader TOPIX rose nine times out of 10.
Correlations this strong are rare. In the past five elections since 2005, foreign investors on average bought 3 trillion yen ($27.3 billion at current rates) more in Japanese stocks and futures than they sold in the seven weeks before voting day.
"Just as Japanese stocks were looking increasingly underpriced by international standards, headlines about a snap election grabbed the attention of foreign investors, which spurred a rally," said Yunosuke Ikeda, chief equity strategist at Nomura Securities.
The Suga cabinet's approval rating is in the basement as Japan struggles to contain rising coronavirus infections. Some observers predict the LDP will lose a substantial number of seats when election day comes.
Yet the buy trigger still worked -- because of the second anomaly. The closer a race looks between the ruling party and the opposition, the more stocks rise during the campaign period.
The three snap elections with the largest gains in the market all had little difference in terms of party approval ratings. The largest rally came during the 2009 race, which led to a rare transfer of power from the LDP to the opposition, followed by the 2012 election that put party back in the government. In both cases, the opposition polled higher than the ruling party at the time the lower house was dissolved.
But these anomalies do not tell the whole story.
"It's true that snap elections are a short-term buying catalyst, but election results are the most important factor," said Ryota Sakagami, chief equity strategist at J.P. Morgan Securities Japan. "Stocks won't keep rising unless a party secures enough seats to carry out bold economic policies."
Share prices continued to rally after the five elections in which the LDP won a standalone majority. In the other five cases, stocks generally hit a wall around election day and slumped thereafter.
This time, market players are not getting their hopes up.
"Investor expectations for the Suga government's economic policy were high for a while after he took office, but have completely evaporated," said an analyst. "They can't get any more disappointed than this, so stocks are rising even with the political turmoil. But markets aren't so naive as to keep the rally going on hopes for the snap election alone."