Can Japan stay on course?


As the Japanese market hits a new 20 year high, what impact will the upcoming snap election have?

The Japanese economy is growing well this year, and corporate earnings are coming in with good gains. The yen has been weak for a long time, Japanese multinationals are competitive, and the Central Bank remains very accommodative. Investment is picking up. Prime Minister Abe is claiming credit for the improvement, the result of his three arrows policies. He fired a monetary arrow with substantial money creation and bond buying by the Central bank. He loosened fiscal policy a bit. He has not delivered so much on his promises of supply side reform. The Prime Minister has now called a snap election, hoping to win a larger majority. It is time to ask if we should worry about the future of the market after its good performance?

Prime Minister Abe is claiming credit for the improvement, the result of his three arrows policies

The market probably favours Mr Abe winning, as many investors know him and broadly support his economic approach. The conjunction of some better numbers on growth and incomes along with the collapse of the main opposition party presented him with an opportunity he could not resist. Current polls and commentary point to him winning another majority in the Parliament. The state of the opposition is weak but difficult to gauge accurately because it has splintered and reformed. A new left leaning opposition party, the Constitutional Democratic party has emerged with no history or form. At the same time the Governor of Tokyo who fell out with the ruling LDP party has set up a new party of Hope and is running a lot of candidates, though she herself is not standing. The establishment assumes her party will not poll well as it lacks a personality fighting the election to become Prime Minister. However, polls also show a lot of people saying they support no party, being reluctant to get behind Mr Abe. There has also been a rise in the numbers dissatisfied with Mr Abe, alongside allegations about the conduct of the government.

There are two main issues in the election so far. The party of Hope and the Democratic party disagree with Mr Abe’s wish to increase the Japanese consumption tax from 8% to 10% in due course. The last time the government raised it had an adverse effect on the economy. The left leaning parties are also in disagreement with the LDP ruling party over amending the constitution to allow more military activity. This is an issue which splits Japan. The Tokyo Governorship election this summer also highlighted allegations of corruption against the ruling party which assisted the new challenger into the office of Mayor, sweeping aide the ruling LDP. The party of Hope wishes to speed up the reforms that Abe has promised. All the parties support the fiscal and monetary arrows Mr Abe has fired, so none represent a threat to the central economic approach.

We accept the consensus view that Mr Abe will remain Prime Minister and the LDP will win the most seats again. No-one can be sure, however, how big a win he will have given two new opposition parties in the field and the reluctance of some to simply vote for the incumbent. It is true Japanese politics is more single party and consensus driven than western democratic politics. The commentators may be right that Mr Abe has correctly judged the weakness of the opposition. The good news for shareholders is that if the electorate surprised by giving more support to the two new challenger parties they are not seeking to slow the economy or to change the main thrust for growth and a bit of inflation. The main divisive issue of Japan’s military role has little economic significance. Some voters will object strongly to changing Japan’s post 1945 refusal to be drawn into conflicts outside Japan, whilst others will be alarmed by the rise of China and the overflight of North Korean missiles and be ready for Japan to change its constitution on this sensitive subject. Overall we do not think the political risk is such as to outweigh the favourable economic backdrop and relatively good value rating for Japanese shares.


The above article was first published by Charles Stanley on 3rd October 2017