TOKYO -- International investors with long memories fear the scandal engulfing Japan's Finance Ministry threatens the political future of Prime Minister Shinzo Abe, recalling the setback to economic reforms that followed the downfall of a Japanese government two decades ago.
Kyoya Okazawa at BNP Paribas in Hong Kong has been fielding questions from investors who want to know whether the prime minister might have to resign in an "Abexit," and how such turmoil would affect the government's nomination of Haruhiko Kuroda for a second term as Bank of Japan governor.
Jesper Koll at WisdomTree Japan has been similarly inundated by phone calls since the end of last week.
The Nikkei Stock Average gained 0.6% Tuesday to close at 21,968. But the yen's recent appreciation and escalating trade frictions between the U.S. and other big economies seem to be keeping Tokyo shares from performing as strongly as their counterparts on Wall Street and elsewhere.
And with the Finance Ministry having admitted to altering documents regarding the sale of state-owned land to private school operator Moritomo Gakuen, more investors are looking to lock in paper gains on Japanese shares soon, Koll said. Questions over the sale have dogged Abe's government, which is suspected of favoring the patriotism-promoting educator, but the latest revelations have put his finance minister, Taro Aso, in what some see as an untenable position.
A combined $2.1 billion has flowed out of about 70 Japan-focused exchange-traded stock funds in overseas markets this month, data from fund tracker Morningstar Direct shows.
Investors remember the political upheaval that struck Japan in 1998. A bribery scandal involving wining and dining of Finance Ministry officials at a restaurant employing scantily clad waitresses led to the downfall of then-Prime Minister Ryutaro Hashimoto's government, putting on hold efforts to reform Japan's bureaucracy and clean up bad loans from the bubble era.
Economic stagnation resulted after false assumptions that Japan's financial crisis was over and the economy had entered a period of self-sustaining growth, Koll said, adding that many investors worry history will repeat itself.
"The main reason investors have held out hope for Abenomics is that the government, the Finance Ministry and the BOJ have worked in sync on policy," BNP Paribas' Okazawa said, referring to Abe's pro-growth policies.
After 1998, Japanese fiscal and monetary policy were out of step, and the country failed to overcome deflation. In light of this, "investors with deeper understanding of Japan are less likely to bet on an optimistic scenario" now, Okazawa said.
Japanese companies and financial institutions are in robust health today, unlike 20 years ago, making any political turmoil unlikely to produce a swift economic slump. But with a rising yen and trade disputes creating uncertainty for the economy, investors "are prone to shed Japanese equity risk in reaction to negative news," Shinichi Ichikawa of Credit Suisse Securities said.
Citigroup's economic surprise index, a barometer of how data over the past three months compared with market expectations, shows that Japan's fundamentals are falling short of analyst projections.
"Until the excessively high hopes are corrected, the stock market is unlikely to have a full-fledged rebound," Ryota Sakagami of JPMorgan Securities said.