Abe’s election victory ensures QE will continue.
The Japanese Upper House election held on Sunday 21 July was a true test of the country’s attitude to ‘Abenomics’.
The result was resounding support for Japanese Prime Minister Shinzo Abe’s economic agenda as his party, the Liberal Democratic Party (LDP), achieved control of both houses of parliament, something not seen since 2010.
The LDP took control of the Lower House after a landslide election win in December 2012. But up until now, it had to rely on opposition support to get legislation through the upper chamber.
John Vail, Chief Global Strategist at Tyndall AM’s global parent company, Nikko AM believes victory means that quantitative easing (QE) should continue apace. In his view, Abe already had the will, but now has the mandate, to carry through with his economic reform plan at a speed that will be beyond market expectations. The immediate economic reaction may be subdued given that many market participants and global equity investors remain sceptical about structural reforms in Japan. Mr. Vail is not. In fact, he thinks reforms will be even stronger than promised before the election and undertaken with alacrity, in what he calls ‘Super-Abenomics’.
Mr. Vail believes that in time, as the markets realise that this occasion is truly different and serious structural reforms are being implemented, the Japanese stock market should perform well. This would have some wealth effect and help drive domestic consumption. In addition, confidence in government stability, with the next election three years away (barring crisis), should help investment in areas such as corporate capital expenditure and housing. Greater internationalisation should occur with some major reforms, such as allowing a gambling industry and accelerating the restart of the nuclear power plants. Although these will be controversial issues, they should have positive effects on the Japanese economy in the longer term.
Abe has promised a more open, more internationally-minded Japan, which will clearly be a boost to the country’s economy. Perhaps his largest reform promise has been to join the Trans-Pacific Partnership (TPP), which aims to establish a free trade association across the Pacific area (likely excluding China). TPP negotiations resumed on 23 July, with Japan at the table for the first time. Japan must hurry to compromise as negotiations are scheduled to be completed this year. However this will not be easy, as politically strong Japanese farmers and other protected industries must take some of the burden.
Abe is also focused on other areas of reform, such as increasing female participation in the workforce and childcare availability, as well as relaxing laws surrounding part-time labour and ‘stress leave’. The swift implementation of these will be critically important for Japan’s return to competitiveness, as it will help offset the demographic problem. Although the overall corporate tax rate will not likely be cut, Mr. Vail believes that breaks for capital expenditure and R&D should be quite generous.
So what does this all mean for global equity investors?
What is being done now hasn’t been attempted for decades. However, there is growing belief in Japan that this time it will work. It’s not just the politicians who support Abe. While he is clearly viewed as a hero within the LDP, he has the highest long-term approval rating of any Japanese prime minister in modern history. In his speeches, Abe has dedicated his career to economic reform and now that he has control of all the levers, we believe the speed of reform will be a major surprise that will be positive for Japanese equities and the Japanese economy as a whole.
In fact, Japan has already started to show growth under Abe’s monetary and fiscal stimulus, with the Yen weakening and equity prices rising. Consensus for GDP for this calendar year is 1.8%, but Nikko AM expects 2% or higher, with more consistent growth continuing after that. The removal of political headwinds bolsters the government’s ability to press forward with all ‘Three Arrows’ of its growth strategy. In Mr. Vail’s view, even after their good performance of the last year, investing in Japanese equities now makes sense.
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Views from John F. Vail, Chief Global Strategist and Head of Asset Allocation, Nikko AM, parent company of Tyndall AM.
