For many investors the Japanese recovery story petered out as prime minster Shinzo Abe struggled with the implementation of his third arrow, structural reform. In reality this was always going to be the hardest part of his plan as making changes to the way a country operates is a huge task and the rewards are never immediate and often unclear.
But Shinzo Abe’s surprise announcement of a snap general election has bought Japan back into focus for many investors. While Abe’s re-election is by no means guaranteed we believe it remains the most likely outcome.
A victory for his Liberal Democrat Party would bring four more years of very accommodative monetary policy; continued reforms in child care, education and women in the work place; and a supportive Bank of Japan as the incumbent governor, Haruhiko Kuroda, is also likely to get re-elected in 2018.
It is also clear that some of Shinzo Abe’s policies since his election in 2012 are having an effect. Core inflation, excluding energy and food, has been positive since the summer of 2015. Unemployment continues to fall as the number of jobs outweighs applicants and has been growing since the financial crisis. At the same time, business sentiment remains positive suggesting confidence of future growth.
Corporate governance, which has been poor in Japan, is slowly improving and employment reforms to bring women into the workplace are also long-term projects which will benefit the Japanese economy and provide a new source of labour, and indeed consumer, to the economy.
Japanese companies have been able to deliver solid earnings growth with more positive news than negative surprises and looks to be spread across a wide range of sectors and industries.
Improving corporate earnings have been supportive of share prices in recent months but they still represent reasonable value compared to the region’s own history and in comparison to other developed markets which look fair value at best, or expensive as in the case of the US. We expect to see corporate earnings diverge more going forward and that should lead to divergence in the market as companies with greater earnings growth outperform.
In spite of the recent good news and performance in Japan, foreign investors have continued to pull money out of the region and foreign investment is at the lowest level since 2011, the year before Shinzo Abe became prime minister.
Overall the picture is looking increasingly positive for Japan. If Abe can secure his re-election then the country, and its markets, could be set for a further boost.
