If she has a spare moment (unlikely), Theresa May might be glancing at the international headlines this morning with a rueful air.
I’m talking about Japan specifically, where Prime Minister Shinzo Abe has just won a “thumping election victory,” as the FT puts it.
Turns out that calling a snap election can sometimes pay off.
It’s the economy, stupid – even in Japan
Shinzo Abe and his Liberal Democratic party (and their coalition partners, Komeito) have won the latest Japanese election. They now have a massive majority – a supermajority, indeed. That’s relevant, because that’s the scale of support Abe needed to revise Japan’s constitution, which has always been a key goal of his.
Abe’s plan is to have a referendum around this time next year to approve his planned amendments to Japan’s pacifist constitution. He wants to add a clause “recognising the legality of Japan’s armed forces”.
One reason behind Abe’s decisive victory was that the equivalent of the “populist” candidate – Yuriko Koike, governor of Tokyo – launched her new Party of Hope early in the campaign, but then refused to run for prime minister. That left the opposition campaigns in tatters.
However, it’s also an endorsement of the political cliche: “It’s the economy, stupid.”
Japan’s economy – from the point of view of those on the ground – has never been in quite as bad a state as the “lost decades” shorthand implies. But it has struggled, no doubt about it. Japan had a truly epic bubble in the ‘80s. Coming down from that particular high was always going to involve a long hangover.
But now – fuelled in no small way by the money-printing bonanza behind “Abenomics” – Japan really does look as though it’s getting back a little of its spark. Japan has generally had high employment, but now labour market strength is back at levels not seen since the mid-1970s. The jobs-to-applicants ratio is at 1.52 (in other words, for every available applicant, there are one-and-a-half jobs that need to be filled). That’s the highest since February 1974. Meanwhile, unemployment stands at 2.8%.
As in most countries around the globe, these historically high levels of employment have gone hand in hand with tame inflation. But it’s hard to imagine that wage inflation can stay acquiescent given that sort of imbalance between supply and demand.
A story on the Nikkei Asian Review this morning notes that the number of jobs that pay at least ¥10 million (just over £65,000 a year – so politician-level wages) is rising – nearly doubling since 2014 – as Japanese firms try to poach mid-career staff from each other. The number of middle-aged workers switching jobs is also rising fast – it’s now double the levels seen before the financial crisis hit.
Meanwhile, Japanese stocks are at a 20-year high, and have just risen for the 15th session in a row. That’s a record.
So while the average Japanese voter might be feeling a little jaded with their prime minister, who has been in charge since 2012, and has now won three elections, they’re clearly still in “if it ain’t broke, don’t fix it” mode.
Stick with Japanese stocks
We’ve been bullish on Japan for a very long time. The reality is that the re-election of Abe is a very minor aspect of that.
Chances are “Abenomics” will carry on as before. That means central bank boss Haruhiko Kuroda – a man who seems very willing to “do whatever it takes” to get inflation going in Japan – remaining in charge of the Bank of Japan.
Beyond that, it doesn’t make a huge difference to the pro-Japan case. You have a country that has been in the doldrums for a very long time following a massive, wealth-destructive bubble. It’s finally emerging on the other side, and as a result, it’s likely to take a lot of people by surprise when it does.
Will the record-breaking winning streak continue? I imagine not. Goldman Sachs noted before the Japanese election that the market tends to have a nice run-up before the election, and then gives a lot of the gains back afterwards.
But unless you’re a trader, that doesn’t matter. In the longer run, Japan is a good market to have exposure to. It’s not as cheap as it was, but it’s still reasonable compared to the US, for example.
Meanwhile, Japanese workers who feel more secure in their jobs and more confident of rising wages, will spend more and be more open to investing some of their savings in the market, rather than “safe” government bonds.
In short, I’d stick with it.