Could another snap decision derail the Japanese economic recovery?

Global election fever is continuing apace with Prime Minister of Japan, Shinzo Abe, this week calling a snap election on 22 October.

A year earlier than planned, Abe is seeking a fresh mandate to overcome a “national crisis” as the threat from North Korea grows – he’s a committed nationalist who has long argued to boost the nation’s armed forces*.

Abe’s party is now riding high in the polls, with a 34% lead over its nearest rivals**, and his own approval ratings have been improving, since reaching a record low over the summer.

This all sounds very similar to Theresa May’s plan not so long ago. Hopefully Abe has learned from her mistakes and will have a stronger campaign – so avoiding any more shocks. Should the result be a surprise win for the opposition, there would undoubtedly be a change in Japan’s macroeconomic policies.

However, most commentators believe that Abe could maintain his supermajority. This means the probability of taxes going up in 2019 would rise and, as a result, the Bank of Japan is likely to have to do more for longer to avoid a recession due to less consumer spending.

Expert views on the snap election

Speaking at an AIC (Association of Investment Company) roundtable, the day after the snap election was called, Andrew Rose, manager of the Elite Rated Schroder Tokyo fund, commented: “Heightened geopolitical tensions have contributed to a strengthening of Mr Abe’s domestic poll ratings, such that he has opted for snap election. Current indications are that he should win this handsomely, although, as we know, nothing is a given in politics.

The Japanese stock market has lagged most other markets in 2017 in spite of robust economic and corporate fundamentals. The economy has grown for six consecutive quarters, which has not happened for 12 years, and corporate profits have entered a positive phase of the revision cycle. Valuations are relatively attractive and investors should continue to benefit from improving corporate governance, one of the main successes of Abenomics.

“Some of the more attractive opportunities are in cyclical parts of the market such as machinery, auto-related companies and electronic component manufacturers. Amongst domestic sectors financials look undervalued and, selectively, we are also seeing opportunities in the retail sector.”

Praveen Kumar, manager of Elite Rated Baillie Gifford Shin Nippon, added: “We remain very bullish on Japan and Japanese smaller companies in particular. The operating environment for the latter has improved considerably over the years. Both domestic and overseas end demand for these businesses continues to be strong.

“Government policy remains geared towards industry deregulation, with a number of progressive policies already implemented. A combination of a favourable operating environment and low valuations relative to developed market peers means that Japanese smaller companies represent a very compelling proposition for long-term investors.

“Our favourite hunting ground for stock ideas is within what we classify as ‘online disruptors’. These are disruptive, innovative and rapid growth businesses usually run by young and ambitious entrepreneurs. We are continuing to find these types of companies across a number of sectors in Japan. Additionally, we are seeing a number of investment opportunities emerge due to the ongoing labour shortage situation, as well as within biotech, where a number of companies are developing exciting and potentially world-leading therapies and drug discovery platforms.”

* Japan is banned by its post-Word War II constitution from having a standing army, although it has a technologically advanced “Self-Defense Force” that eschews offensive weapons, such as bombers, aircraft carriers and long-range missiles.

** The Nikkei & TV Tokyo  between 25 and 27 August 2017