Amid all the fuss about the US fiscal cliff, investors may be missing “another political drama with equally weighty implications”, says Martin Mittelstaedt in Canada’s Globe and Mail: Japan’s election on 16 December. It looks as though Japanese voters “are going to make their biggest attempt to date to extricate their country from its deflationary predicament”.
Shinzo Abe, the frontrunner, is an advocate of aggressive fiscal stimulus and unlimited monetary easing, with an explicit inflation target of 2%-3%, compared to the current 1%. He has pledged to ensure that the Bank of Japan (BOJ) does his bidding, “or he will rewrite the BOJ law to let him fire them”, says CLSA’s Nicholas Smith.
So far, Japan has been printing money to inject into the economy, but not as much as other countries. Full-throttle quantitative easing, the thinking goes, will weaken the currency significantly; the half-hearted money printing seen so far has left Japan lagging behind in the global race to devalue currencies and thus boost exports. Because the stockmarket is so full of major exporters, a weakening yen should give equities a big boost.
The Nikkei has already bounced by almost 10% on the so-called “yen rout trade”, says Businessweek.com. It also bodes well that global fund managers have the lowest net exposure to Japan in ten years. So there is scope for lots of money to join the rally. Still, “it has been a fool’s game to guess when the yen will finally weaken”, says James Hunt of Tocqueville Asset Management.
But even if this isn’t the beginning of a strong market rebound, Japan remains appealing for patient, long-term investors. Companies have grown their earnings by almost 50% in the past 12 years and their return on equity, a key gauge of profitability, has risen from 6% to 10%. The strong yen has forced exporters to cut costs and move production to lower-cost sites in Asia, which will boost their profitability.
And with the wider market still trading at just below book value, many firms are available at a discount to their intrinsic value. Meanwhile, the Nikkei’s dividend yield has risen from 0.8% to 2.3% in the past 12 years. Abe’s election and a weaker yen may not be it, but, as Hunt says, “there will be a moment when the broad process of de-rating has run its course”.