If Abenomics succeeds, corporate sector will benefit from weaker yen, says GAM’s Ben Williams

Ben Williams, fund manager of the GAM Star Japan fund, comments on the election aftermath in Japan.

The bullish scenario for Japan

The Japanese government has identified the need to get the private sector’s idle assets back into the economy, which should see both the economy and government deficits improve.

The Liberal Democratic Party (LDP) won the Upper House election at the weekend. Along with their coalition partners they hold 135 out of the 242 seats, giving them a majority and chairmanship on all house committees. This gives the government a strong platform to pursue its reform agenda.

It seems to be the goldilocks scenario whereby the result is strong enough to ensure a majority but not strong enough for the government to pursue constitutional change (which would require a two-thirds majority). Many people were concerned that constitutional change would distract the government and antagonise Japan’s neighbours.

If Abenomics is successful, the corporate sector should benefit from a weaker yen, which will prompt a recovery in exports, which in turn will lead to profit growth. This will enable companies to increase their capital expenditure (capex) and to provide shareholders with higher distributions.

Higher capex will lead to a decline in corporate sector savings and boost tothe economy. So far the signs are encouraging: business and consumer confidence has been on the rise and economic data is encouraging. In short, Abenomics is working.

For the household sector, cyclical and structural factors should both be positive. On the cyclical side, an export-led profits recovery should improve bonus payments to employees and improve employment prospects. If companies increase shareholder returns, this should also boost household incomes, and in turn consumption.

On the structural side, Japan’s population is ageing, which is widely regarded as bad news due to the burden welfare costs places on the government. However, at least in the mid-term, the ageing population could be somewhat supportive of the Japanese economy. There is a perception that pensioners are helpless and that the greater the number, the greater the drag on the economy. Pensioners in fact own a huge proportion of the financial assets in Japan. In short, elderly Japanese are rich.

Their savings are currently sitting in the bank idle and it is widely recognised that excess savings in the private sector are partly responsible for Japan’s anaemic growth. As pensioners start to draw on their retirement assets, the savings rate will decline. This running down of savings should boost the economy through increased consumption.

There are many people who believe large government deficits are entrenched in Japan, however when private sector savings balances fall, government deficits typically improve. If Abenomics is successful in its efforts to inject confidence into the private sector, there is every chance fiscal worries will dissipate. This could lead to even greater confidence for the future of the private sector.

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