The sun is rising on Japan’s stocks

“Markets like strong leaders with big mandates,” as Luke Bartholomew of Aberdeen Standard Investments told the Financial Times. Japan’s prime minister Shinzo Abe has succeeded where Theresa May failed, retaining his two-thirds majority in the Lower House last Sunday after calling a snap national election last month. The Nikkei promptly climbed to a fresh 21-year high. It has risen for 15 successive sessions, a record streak.

Another Abe term means that the stimulus programme known as Abenomics, a mix of structural reform, pedal-to-the-metal quantitative easing and fiscal stimulus, should continue. It has been applied since 2012, and the economy is starting to show signs of life after almost two decades of stagnation. GDP expanded at an annual pace of 2.5% between April and June, marking a sixth consecutive quarter of expansion – the longest streak in a decade. The quarterly Tankan survey, which gauges the mood of large manufacturers, is at a ten-year high.

The labour market is tightening rapidly, fuelling hope that higher wages will soon finally begin to bolster inflation. Unemployment is at 2.8%, the lowest in over 20 years. The jobs-to-applicant ratio is 1.52: for every person chasing a job, 1.5 jobs need to be filled. This hasn’t happened since 1974. The number of people switching jobs has reached a ten-year high. Consumption has therefore improved in the past few months.

“Political and policy stability is poised to add momentum to Japan’s domestic business investment cycle,” adds Jesper Koll of asset-management group WisdomTree. Some big names, including Canon, are building new production capacity. Small and medium-sized firms are upgrading their equipment. Meanwhile, many Japanese companies, notably the stockmarket heavyweights, are exporters benefiting from an increasingly robust global upswing and the lagged impact of a fall in the oil price, says Chris Taylor of Neptune Investment Management. The impetus from lower oil prices is especially evident in emerging markets, which Japan is far more exposed to than other developed countries. 

No wonder, then, that earnings per share jumped by 13% in the year to April 2017 and by 26% year-on-year in the subsequent quarter. Valuations remain compelling and the new push towards making companies more shareholder-friendly is bolstering buybacks and dividends. Japan remains a buy.

A worrying rush to risk

At this time of year, emerging markets with fragile economies traditionally lobby the International Monetary Fund for aid. But this autumn they needn’t bother, says Landon Thomas in The New York Times. “They’ve found a much more relaxed lender.” Investors desperate for yield are rushing into increasingly exotic and risky areas.

Middle Eastern states have started to tap global markets, and so far this year have issued $60bn of bonds, say Thomas Hale and David Sheppard in the Financial Times. A much riskier proposition still is Tajikistan, which has issued $500m of ten-year paper yielding 7%, says Thomas. The sum constitutes 7% of its GDP and towers over its $74m of forex reserves.

The likes of Nigeria, Egypt, Ivory Coast and Suriname have also been pitching debt to investors. Developing states will issue around a record $150bn or so of bonds in 2017 – almost twice 2015’s total. Yet many states are already highly indebted and will now be even more vulnerable to higher interest rates and capital flight from risky assets. This rush into risk is unlikely to end well.

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