Japanese shares slumped overnight after NHK, the country’s national broadcaster, reported prime minister Shinzo Abe would step down due to health concerns.
Tokyo's Topix Index fell as much as 2.3 per cent in Japan’s afternoon trading, wiping out the strong gains the stocks had made over the past five days.
It later recovered slightly, closing 1.7 per cent down from its daily high.
NHK said Mr Abe, the country’s longest-serving prime minister, had visited the hospital twice in the past two weeks — fuelling rumours of his ill health — and would hold a press conference later today to explain his decision.
Markets have been shaken by the possible end of “Abenomics”, the prime minister’s signature monetary and fiscal policy programme, which focused on boosting the nation’s money supply and increased spending in a bid to make the economy more competitive.
He also introduced sweeping corporate governance reforms to encourage small companies to spend the funds on their balance sheets which in turn helped shareholder returns.
Joe Bauernfreund, manager of the AVI Japan Opportunity trust, previously told FTAdviser Mr Abe’s reforms had resulted in companies adopting higher payout ratios to improve shareholder returns and overall had helped investors.
The combination of potential political uncertainty brought about by the change — Japan had a ‘revolving door’ of prime ministers before Mr Abe — and fears of a rollback of his economic policy saw the markets dip. The Nikkei 225 was also down 2.3 per cent.
Safe haven assets, including the Japanese Yen and gold, strengthened slightly on the reports.
Investors in Japanese stocks have seen strong returns in recent years.
Over a five-year period, funds in the IA Japan sector have returned an average of 44 per cent.
The market has also been fairly resilient to the coronavirus crisis, losing just 3.8 per cent over the past year and returning 2 per cent on average over the past three months.
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