Japan is now set for a period of political stability after years of leadership changes and legislative gridlock, says Yuka Hayashi in The Wall Street Journal. Prime minister Shinzo Abe’s Liberal Democratic Party has won a majority in the elections for the upper house. That followed a victory in December that put the party in charge of the lower chamber. With another national election not due until 2016, Abe now has plenty of scope to advance his “ambitious growth agenda”.
He intends to pursue a wide range of structural reforms, ranging from deregulating cossetted sectors, such as agriculture and healthcare, to reducing red tape for start-ups. These changes are referred to as the ‘third arrow’ of his programme for ending deflation and galvanising growth. Ambitious money printing – which is weakening the yen – and fiscal stimulus are the other two.
Two policy steps in particular “could juice stocks further”, says Aaron Back, also in The Wall Street Journal. Overhauling labour laws should make it easier to lay off staff. Trimming Japan’s corporate tax rate, among the developed world’s highest, would boost earnings and competitiveness. Meanwhile, a positive economic backdrop – supermarket sales posted their fastest annual rise in a decade in June – should make structural reforms easier to implement.
While investors await Abe’s attempted reforms, there are shorter-term reasons to be bullish, says Lex in the FT. The impact of the sliding yen doesn’t appear to have been factored into earnings yet. Big companies have pencilled in a 25% year-on-year profit increase in the past quarter. But they have been conservative in their currency forecasts.
Many have assumed a rate of ¥90 to the dollar for the year. But the yen’s average last quarter was ¥99. So profits could actually rise by 40%, reckons Nomura, a bank. “That is the sort of scale that should produce upwards profits revisions just as earnings become the market driver,” says Lex. Recent years have seen widespread restructuring and consolidation at Japan Inc, which should boost profitability, says the FT’s John Authers. Five years ago there were 11 major department store chains in Tokyo. Now there are four. With a solid economy and still-reasonable valuations, profits should help Japan’s bull run endure.