By Geoff Spiteri, BNY Mellon Investment Management EMEA
Between 2006 and 2012, Japan had no less than seven prime ministers; more than one a year. November’s landslide election of Shinzo Abe for a record-breaking third term signals a decisive end to an era of political instability and bodes well for a reinvigorated economy, says Miyuki Kashima, head of BNY Mellon’s Japanese Equity Investment Division.
As political rebirths go, that of Japanese Prime Minister Shinzo Abe is as good as it gets. First elected in 2006 but forced to step down just over a year later for health reasons, his return to power in 2012 marked the first time a Japanese former prime minister had served a second term since 1948. With November’s landslide election victory, in which the governing LDP maintained its two-thirds “supermajority” in the 465-member lower house, Abe is now on course to become one of the longest-serving prime minister in Japanese history.
Thanks in part to this decisive election result, things are looking up for Japanese investors. Immediately after Abe’s most recent victory, the Nikkei 225 hit a 21-year high, building on a run that saw Japanese equities comfortably outperform European and US stock markets since the start of September.
On the macroeconomic front, too, the picture looks rosy. Corporate profits and business sentiment are up. GDP has risen for seven quarters in a row, its longest spell of interrupted growth for 16 years. Nominal GDP was almost 11% higher in the third quarter of 2017 than it was five years earlier. 1 For Miyuki Kashima, head of BNY Mellon’s Japanese equity investment division, this spurt of growth is a major milestone. For the first time since 1997, nominal GDP is now above ¥533 trillion, meaning the economy has finally recovered the ground lost over two long decades of decline.
“If you step back and look at what the government promised on the economy and what it has actually achieved since it launched fiscal and monetary stimulus in 2013, it’s pretty impressive,” she says. “We think it points the way to a positive outlook for investors.”
That’s not to say more can’t be done, however. The government’s nominal GDP target of ¥600 trillion, for example, is still some way off, and consumption remains lacklustre, particularly in areas, such as housing spending and non-residential investment.
Likewise, Japan’s demographic trend of a rapidly ageing population continues to present a challenge. Here, says Kashima, there is a need to continue to invest in automation and in machines that can do some of the more mundane manufacturing roles.
The government’s 2% inflation target also remains elusive despite pressure being brought to bear by the government on Japanese blue-chip companies to raise wages. For the year to September, consumer prices (excluding fresh food) rose just 0.7%. But Kashima argues those looking for higher inflation should be careful what they wish for. “While no one wants a return to falling prices, I’m not convinced 2% inflation would be broadly welcomed either. If it did hit that rate, you could expect to see a lot of criticism from pensioners and similarly affected groups. Consumers are so acclimatised to static or falling prices: they might struggle with genuine change.”
For now, the decisive nature of the election result suggests continuity in the make-up of the government, says Kashima. “Quite often an election in Japan is followed by wholesale changes to the roster of ministers and their portfolios but this doesn’t look likely this time. Crucially, we expect ‘Abenomics’ 2 to continue.”
The election result also makes it more likely some of Abe’s long-cherished legislative programmes will be approved. Chief of these is a change to the Japanese constitution allowing the Self-Defence Force to take a more active role – an important consideration given rising tensions with North Korea. Elsewhere, Abe has promised to increase the national sales tax from 8% to 10% in late 2019. This is also seen as an important move if Japan is to meet rising social security costs and to begin to pay back its public debt, which is now more than double the size of its economy.
Just as significant is Abe’s pledge to use some of the funds raised from the sales tax hike to increase provision of pre-school education. In theory, this could boost the female participation rate in the Japanese economy, a crucial factor in light of the ageing population.
For now, though, Kashima highlights at least one unexpected consequence of the LDP’s election victory. “Given Japan’s recent history of rotating prime ministers, it’s ironic that Abe has gone from being a less-than-one-term prime minister to now becoming a symbol of the status quo and has been subject to some criticism on that front. It’s almost as if people were so used to seeing their leaders come and go that having one prime minister stick around for even just a few years provokes concern. That’s all very well, but I can’t think of a single economy that’s performed well with a ‘musical chairs’ type of leadership.”
1 The Economist: ‘The slow-grilled economy’, 18 November 2017
2 Abenomics is the name given to the programme of fiscal and monetary stimulus to keep Japan on a growth path that’s been in place since 2013.
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