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Japan: Abe’s arrows hit the mark

Japan: Abe’s arrows hit the mark

It is crunch time for Shinzo Abe, following his decision to call a snap general election.

The move follows a challenging period for Abe, after allegations emerged of favours for two school operators with personal links to him. This caused his popularity to nosedive, as some started to question his leadership credentials. His party, the Liberal Democratic Party (LDP), also suffered a historic defeat in the Tokyo elections in early July.

But the prime minister’s popularity has recovered since the summer, buoyed by a cabinet reshuffle and his handling of tensions with North Korea. With this in mind, Schroder Tokyo manager Andrew Rose describes the timing of the election as ‘opportunistic’.

Continued progress

Since Abe first came to power more than four and a half years ago, he has introduced sweeping reforms, dubbed ‘Abenomics’, that aim to break Japan’s 20-year deflationary cycle. They comprise three ‘arrows’: quantitative easing, fiscal stimulus and structural reforms.

He has made progress in all three areas, but more needs to be done. So the upcoming election represents a critical point for Abenomics. As the population takes to the polls on 22 October, what can investors expect? ‘It would be a major surprise if he’s not still prime minister afterwards,’ said Rose.

Harry Waight, investment analyst at BMO Global Asset Management, said: ‘An extension of Abe’s tenure should be welcomed by equity investors, offering the prospect of continued Abenomics. We’re already seeing elevated levels of foreign interest in Japanese equities since the election was announced.’

Unknown opposition

In Rose’s opinion, there is one ‘unknown’ for Abe: namely the momentum gathering behind the new Party of Hope. Led by Tokyo governor Yuriko Koike, it represents a realignment of the opposition.

‘Koike may take some votes from Abe, but I think the LDP will be the biggest party. The key question for the stock market is: how many seats would Abe have to lose for his position to be threatened in the party?’ said Rose.

Archibald Ciganer, Citywire AA-rated manager of the T. Rowe Price Japan Equity fund, believes a stronger opposition could prove positive for Japan. ‘Abe is currently pushing to revise the country’s pacifist constitution, to fulfil his ambition to reintroduce the Japanese military. Opposition voices are keen for Abe to forego these efforts and accelerate economic reforms. This, in turn, would continue to boost the domestic economy and the local equity market,’ Ciganer explained.

On the rise

So where do the investment opportunities lie in Japan? Ciganer said Abe’s policies, which sought to improve corporate governance and shareholder returns, are starting to bear fruit.

‘With global economic conditions now showing stability and modest improvement, double-digit earnings growth is being delivered in Japan in 2017. And forecasts continue to show a superior profits growth outlook in Japan versus Europe and the US,’ he added.

The Japanese stock market also looks attractive on a valuation basis, compared with other markets. ‘Japan offers investors low valuations, with price-to-earnings, price-to-book and dividend yield all looking good compared to other developed markets,’ said Nicholas Weindling, Citywire A-rated manager of the JP Morgan Japanese investment trust.

Weindling focuses on companies with the potential to improve shareholder returns and plug into structural growth in areas such as e-commerce and automation. He likes the fact these businesses tend to be less sensitive to the yen/dollar exchange rate. ‘We also find strong investment opportunities in new Japanese brands growing globally,’ he said.

Positive picture

Despite uncertainty created by the election, the outlook for Japanese equities remains positive. Tensions with North Korea are the main headwind, but Rose said it is difficult to position for this in the portfolio.

‘The fundamentals are pretty good. The economic backdrop looks supportive, the policy backdrop is by and large accommodating, and the profits picture is positive,’ he concluded.

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