The rise of Japan Inc.
By Ineke Valke, senior investment strategist at Theodoor Gilissen, a member of KBL European Private Bankers
Japanese equities are booming. Despite a slight downturn over late May and early June, due to concern about a potential US rate hike, the benchmark Nikkei 225 index has posted sustained, substantial gains since the end of 2013.
Indeed, although macroeconomic developments remain subdued, there remain very good reasons to be positive on the country’s equity markets – especially the corporate sector’s increasing focus on profitability and shareholder value.
Within days of taking office in 2012, Prime Minister Shinzo Abe laid out his strategy for resuscitating the economy through three key actions: fiscal spending, monetary easing and structural reform.
Abe has so far only shot two of the three arrows in his landmark reform plan, known as “Abenomics,” although more progress is being achieved on the third arrow – structural reform – than currently meets the eye.
Since 2012, Bank of Japan (BoJ) Governor Haruhiko Kuroda has overseen a quantitative easing (QE) programme that is injecting ¥80 trillion (€615 billion) annually into the national economy.
The BoJ now owns a quarter of outstanding bonds, making a purchase about once every three days, which is regularly rallying the stock market. The Central Bank is also buying roughly 90% of the government’s new issues, adding 15% of GDP to QE.
Japanese QE is ostensibly aimed at staving off deflation and generating an annual inflation rate of 2%. Despite a strengthening labor market and improved manufacturing output, this remains an area of concern.
In April 2015, the inflation rate remained low – at 0.6% on an annualized basis – on the back of soft oil prices and weak household spending both.
Meanwhile, the massive Government Pension Investment Fund (GPIF) – with assets of ¥137 trillion (€980 billion), nearly equal to the annual GDP of Mexico – is now pivoting firmly away from bonds in favor of riskier equities.
The aim of this strategy, in place since the fourth quarter of 2014, is to stimulate the overall economy and finance ballooning pension payments. (One-quarter of Japan’s population is over 65, making it the world’s most rapidly aging nation.)
Actions by Abe and Kuroda have helped bring down exchange rates, supporting significantly increased export levels. Indeed, the yen has fallen 50% against the dollar since the end of 2012, leading to a 2.7% rise in exports in the final quarter of 2014, boosting corporate earnings.
More broadly, the prime minister’s reform package aims to liberalize the economy and foster innovation by freeing up the healthcare sector, facilitating greater (local and foreign) entrepreneurship and overhauling corporate governance. In particular, Abe wants to address the core issue facing the country: how to expand the workforce at a time when the population is aging and shrinking.
Abe’s third arrow has disappointed investors until now. However, progress is already taking place. Japan’s tourism sector, for example, is now extremely strong – with monthly visitor numbers reaching 1.76 million in May 2015 alone, up 43% compared to the same period in 2014.
The energy sector is also picking up, including through the imminent restarting of the country’s nuclear power sector some four years after the disaster at the Fukushima Daiichi power plant, caused by a seismic tsunami. All of Japan’s nuclear plants were shut down in the wake of that catastrophic event. Officials have now approved the resumption of operations, starting this summer.