The "three arrows" playbook of aggressive monetary easing, fiscal spending and structural reform that outgoing Prime Minister Shinzo Abe deployed to revive Japan's economy scored few bull's-eyes over his administration's record run since late 2012, but investors are hoping his successor picks up the quiver and runs with it.
Investors, especially foreign investors, were unnerved by Mr. Abe's surprise announcement on Aug. 28 that he will step down for health reasons, in part because the prime minister has been so closely identified with the "Abenomics" policy mix he came to power touting, wrote Masaki Taketsume, a Tokyo-based fund manager with Schroder Investment Management (Japan) Ltd., in a market commentary.
But as Mr. Abe heads to the exit, awaiting a Sept. 14 ruling party vote to anoint a successor, analysts say the latest signs all point to continuity.
Of the five or six ruling Liberal Democratic Party chieftains expected to vie for the top spot, Yoshihide Suga — the chief cabinet secretary who served as Mr. Abe's right-hand man throughout his eight-year run — looks to come out on top, a reassuring choice from a policy standpoint, said John Vail, Tokyo-based chief global strategist with Nikko Asset Management.
Institutional investors drawn to Japan's market on the strength of policies Mr. Abe set in motion say they see no reason to expect the upcoming leadership rotation to result in any material changes to the outlook for Tokyo-listed stocks.
David J. Holmgren, chief investment officer of Hartford, Conn.-based Hartford HealthCare's $3.3 billion in endowment and pension assets, said his team closely tracked the rumors about Mr. Abe's health that began circulating in late August and concluded there will be "a continuation of policies, which should keep our thesis for Japan intact."
That thesis — which led Mr. Holmgren to move from an underweight position in Japanese equities to an aggressive overweight for Hartford HealthCare's portfolio in 2017 — held that the Abe administration's push for corporate governance and stewardship reforms was setting the stage for greater value creation by Japanese companies.
And if Warren Buffett made waves last month by confirming he had plowed $6 billion into Japan's top five trading houses to acquire a 5% stake in each, analysts say a broader recognition of the value on tap now in Japan's stock market could emerge when the country turns the corner in addressing the impact of the coronavirus on the Japanese economy.