The government of Japanese prime minister Shinzo Abe was convincingly re-elected in a snap election last weekend. Abe now has four more years in power, and investors will watch closely to see whether he can push through promised reforms to raise Japan’s long-term growth rate, says Aaron Back in The Wall Street Journal.
Investors have yet to be convinced that he can stare down vested interests. Meanwhile, Japan’s economic recovery has faltered due to a rise in the consumption tax (the equivalent of VAT). The economy seems to have stabilised, but the data points to a slow recovery.
But there are grounds for optimism. The labour market is tightening – large manufacturers are reporting the most severe labour shortages since the early 1990s – and wages have risen. So far, wage gains have been eclipsed by the consumption-tax hike.
But as the tax shock fades, higher wages should boost consumption and business investment, leading to higher prices and more wage hikes. Another boost to investment could come from companies moving their production back to Japan from overseas, reckons Peter Tasker in the Financial Times.
The fall in the yen, a result of the Bank of Japan’s quantitative easing (money printing), is making them “super-competitive”. So it no longer makes sense to be based abroad to keep costs low. Falling oil prices, meanwhile, amount to a tax cut of 1% of GDP for oil importer Japan.
But for investors the main attraction is not the country’s economic prospects but the central bank’s ongoing money printing – “the most extreme monetary blitz ever attempted in a modern economy”, says Ambrose Evans-Pritchard in The Daily Telegraph.
It is printing 1.4% of GDP a month, and will ease further if necessary to reach its 2% inflation target. This implies further yen weakness, and rising earnings for the stockmarket’s export-orientated heavyweights.
Some worry that the yen’s decline could turn into a rout if markets take fright at Japan’s vast public debt load, worth 245% of GDP. But this seems unlikely. Markets know that ending deflation would lighten the debt burden, and should at least give Abenomics time to work.
Meanwhile, pressure on Japan Inc. to pay higher dividends is rising; the government has pushed the government pension fund to buy equities and valuations are still reasonable. Japan remains a buy.