(Bloomberg) -- The newfound influence of opposition lawmakers in Japan has investors looking for gains in the shares of retailers and electricity generators.
That’s due to expectations that Prime Minister Shigeru Ishiba may cut taxes to keep smaller parties on side — increasing workers’ disposable income — and because both the ruling coalition and its most likely allies want to restart more of Japan’s nuclear reactors.
The outlook for other sectors is less clear.
Defense-related shares face risks from parliamentary division over how to fund a planned increase in military spending. Investors also worry that a more fractured government will be slower to make decisions, delaying key moves like corporate governance reforms and trade negotiations with an upcoming Trump administration in the US.
“With the ruling parties now in a minority, they’ll have no choice but to coordinate with the opposition,” said Yuko Iizuka, an economist at Asset Management One. While this raises risks of parliamentary instability, the increased bargaining power of opposition lawmakers pushing for higher consumer incomes will be a positive for businesses, she said.
Ishiba was confirmed as the prime minister of a minority government in a special parliamentary vote on Monday, after his ruling Liberal Democratic Party and its coalition partner, Komeito, lost their majority for the first time since 2009 in October’s lower-house election.
AI-related stocks could see long-term upsides from Ishiba’s re-election, after he promised a ¥10 trillion ($65.1 billion) aid package for artificial intelligence and semiconductors by 2030 following Monday’s vote.
But to proceed with policies, Ishiba will have to rely on the support of like-minded opposition groups, particularly the Democratic Party for the People, which quadrupled its seats in the election on a promise to introduce tax breaks for low-income workers.
Shares of chip component maker Renesas Electronics Corp. climbed 8.2% on Tuesday, boosted by Ishiba’s aid pledge and speculation that the company might gain market share from US rival Monolithic Power Systems Inc. Other chip-related stocks, including Tokyo Electron Ltd. and Advantest Corp., declined on weak US tech shares overnight.
Japan’s broader Topix Index was up 0.1% as of market close in Tokyo, while the Nikkei 225 fell 0.4%, as stocks fluctuated on uncertainty over US and domestic politics.
Winners and Losers
Retail companies are expected to win out if the DPP’s pledge to raise the ceiling of tax-free income from ¥1.03 million to ¥1.78 million — a move that would increase spending money for young and part-time workers — comes to fruition.
Shares of consumer retailers like Ryohin Keikaku Co., MatsukiyoCocokara & Co. and Shimamura Co. all rose more than 1.2% on Oct. 31, despite a 0.3% decline in the broader Topix, after DPP leader Yuichiro Tamaki posted on X that his party could not cooperate with the ruling coalition unless the “¥1.03 million wall” was raised.
The LDP has said it’s open to “realistic discussions” on the policy, but has cited concerns about how much income the government may lose as a result. Supermarket and department store stocks have an upside if government discussions on the proposed tax breaks proceed, said Yukihiro Kawanishi, a senior strategist at Aizawa Securities.
Shares of energy companies also stand to benefit from the pro-nuclear power stance of emboldened opposition parties, said Hiroshi Namioka, chief strategist and fund manager at T&D Asset Management.
“The DPP is basically in favor of nuclear energy, so we’re unlikely to see any slowdown in the government’s plan to restart more reactors,” he said. The Japan Innovation Party, another key potential ally for the LDP, also supports atomic energy.
The Topix’s gauge of electricity and gas providers gained 4.4% in the week after the election, outperforming the broader index’s rise of 1%. The restarting of a nuclear reactor located near the epicenter of the 2011 Tohoku earthquake on Oct. 29, two days after the vote, helped boost the sector.
The LDP-led government has been attempting to revive Japan’s largely-dormant atomic energy industry since the 2011 disaster triggered a meltdown at the Fukushima Daiichi Nuclear Power Plant. The Constitutional Democratic Party, the LDP’s largest rival, opposes that policy, but support from the DPP and others would enable the ruling party to push it through, Namioka said. “I expect utility shares across the board will rise,” he said.
The outlook is murkier for defense-related stocks, as a plan to increase Japan’s defense budget is expected to become a sticking point between parties. Before its election losses, the LDP had said it would hike corporate, income and tobacco taxes to pay for extra military costs, but the DPP, while in favor of bolstering defense, has made clear it would oppose such tax rises.
Inter-party squabbling is also likely to slow down the overall pace of policymaking, potentially delaying future government decisions on issues like corporate governance, said Chris Smith, co-manager of the Japan Value Fund at Polar Capital in London.
“Corporate reform is fundamentally the most important thing in terms of direction for Japanese equities,” Smith said. “I think all parties appreciate the need for Japan to change, but the pace of change going forward will depend on those in power right now.”
--With assistance from Aya Wagatsuma.