Why Japan’s problems could be solutions for investors
For three decades Japan has experienced bouts of deflation and persistent weak growth. And, on the...
Having recently become the longest serving Prime Minister in Japan, Abe Shinzo announced that he would be stepping down from his position last Friday, due to ill health.
His resignation brings to an end an eight year term during which he established political stability, enhanced international presence and introduced a new brand of constructive economic and social reform, ‘Abenomics’.
After decades of deflation and disappointing stock market returns, the Nikkei 225 – Japan’s main index – returned 125%* over this tenure, and reached levels not seen since the early 1990s.
So, what impact does his resignation have on the outlook for Japanese equities? We asked five Elite Rated managers for their views:
Chisako Hardie, manager, AXA Framlington Japan
“This is the second time Prime Minister Abe has stepped down due to this underlying health issue. Outside Japan few people remember the first time. It was in September 2007 after only 12 months after his appointment as the youngest Prime Minister since World War II. In August 2020, he became the longest serving Prime Minister in Japanese history by beating the record held by his great uncle, Eisaku Sato. This time it is likely that he will be remembered and for many reasons other than the length of his tenure.
“Abe worked hard to boost the presence of Japan in the international community. The relationship with China has improved, as did the relationship with the US. However, he is not leaving the stage without regrets, as a number of issues remain undone. Despite handling the situation much better than most other major countries, many businesses are straining under severe hardship due to COVID-19; the Tokyo Olympics 2020 has been postponed and the Japanese now worry about a further postponement or even cancellation. The negative impact on tourism, which was a major part of Japan’s growth strategy, is likely going to be long term.
“A better work/life balance and gender equality are still desperately needed and the quickly ageing population is a long term seriously deep-rooted problem of Japan. Unless Japanese society drastically changes its sense of values, there is considered to be a grim outlook.
“It is too early to say who is likely to be the next prime minister of Japan. However, at the moment, Mr Yoshihide Suga, Chief Cabinet Secretary, seems to be the strongest candidate. Mr Suga has been working very closely with Mr Abe since the beginning of the Abe’s administration. Commentators believe that if Mr Suga becomes the next prime minister, it is likely that his administration will look like an extended line from Abe’s days. I do not see any need to restructure the portfolio because of Abe’s resignation.”
Richard Kaye, co-manager of Comgest Growth Japan
“The short-term risk for Japanese equities is uncertainty until the leadership election, but that is a question of weeks, not months. And the consensus around policy direction remains far tighter in Japan than most major countries – Abe only catalyzed changes. We met one of the potential successors, Mr. Kono, in 2015. Like all the candidates, he appears to share the realism and dream of Abe, even if some details of policy are different.
“The opportunity for investing in specific companies in Japan remains one of the most interesting among major markets. Japan has nearly 3000 listed companies and many have proven their strength having survived all types of challenge: decades of currency appreciation, lack of natural resources, geopolitical risk, economic stagnation and Asian competition.
“In my view, Japan’s emergence from its twenty year hibernation has only just begun. Mr. Abe was an important symbol and the man who helped turn a page, but the excitement of this market lies in 3000 companies which include many world leading franchises, and 126 million people whose potential has long been underrated by global investors.’’
Archie Ciganer, manager of T. Rowe Price Japanese Equity
“We believe that, despite his resignation, Abe will remain influential within Japanese politics and within the LDP party. This is important from a continuity perspective. His successor will most likely come from his closer allies within the party and continue to move forward with the broad principles of constructive politics.
“The case for Japanese equities is still a good one, especially as we continue down a path of improvement from a structural and global economic dimension. With corporate Japan evidencing little to no net debt, and with corporate governance improvement continuing to show itself, even as corporate profits have been pressured, Japan provides a very different set of characteristics to US equities which have led the strong equity market rally in recent months.
“As we look forward to the next stage of the equity cycle and the next evolution of domestic and international political governance, we continue to feel that Japan is a compelling active management case, given its under-owned and positive change dynamics.”
Sophia Lia, co-manager of First State Japan Focus
“The short-term impact is likely to be a strengthening of the Japanese Yen and weak market sentiment due to the higher uncertainty. However, the new Prime Minister will still come from the Liberal Democratic Party (LDP), which is the ruling party, and the approval rating of opposition parties is extremely low right now so [even if a general election is called early] I don’t see this as a potential problem. There is also no expectation that the change in leader will result in any major changes, including accommodative monetary policies.
“The one area where there is concern is that improving corporate governance could come to a halt, as Mr. Abe was its greatest supporter. But we believe that this has become an irreversible trend that cannot now be interrupted: Japanese companies are focusing on shareholders’ return and corporate governance, as it’s become a consensus in an homogenous society.”
Andy Brown, Japanese product specialist, Baillie Gifford Japanese
“During his current leadership, Abe has put in place several structures which will last beyond his administration and implemented reform which is, in my view, irreversible. This includes a new corporate governance code, a new stewardship code, the opening up of labour markets, improved infrastructure to support female employment participation, a close and affective working relationship between the central bank and government and a more supportive environment for overseas investment.
“The LDP party is likely to remain dominant in Japan, with the various opposition groups lacking support to challenge it. We expect the political backdrop to remain relatively stable with or without Abe at the helm, and we do not think a change in leader would have any material impact on the long term growth prospects of the businesses that we own or indeed the stock market as a whole.”
*Source: FE Analytics, total returns in sterling, 17 December 2012 to 31 August 2020