Japanese election flirts with investor sentiment, says Aberdeen’s Kwok
Chern-Yeh Kwok, head of Japanese Equities at Aberdeen Asset Management, says investors should not bet on any improvement in growth just because of yesterday’s election outcome.
“The triumph of hope over experience” was George Bernard Shaw’s pronouncement on second marriages. It is an apt description for foreign investors’ repeated infatuation and subsequent falling out with Japanese stocks over the years. The Nikkei remains stubbornly within the 8,000-10,000 range – a quarter of its all-time high.
Following the landslide victory at the weekend by the LDP, investor juices have started flowing again. Shinzo Abe has become prime minister for a second time. Like the four prime ministers who preceded him, Abe does not command the stage. Last time he stepped down because of a stomach complaint.
Abe has campaigned for an end to deflation. He has also promised a robust defence of Japanese claims to the disputed Senkaku islands – the cause of a diplomatic rift with China and wildcat strikes against Japanese corporates on the mainland.
But the odds for any kind of economic turnaround are not in Abe’s favour. With the country now in its fifth recession in 15 years, and having shrunk in the past three out of four years, gloom is like permafrost. The post-tsunami spending recovery never happened.
The LDP’s prescription for recovery is for the Bank of Japan to adopt an inflation target of 2-3%, a doubling in the consumption tax (that all parties have signed up to) to 10%, and to ramp up public works by Y200 trillion.
It is a populist agenda yet the public’s support is hardly overwhelming. Japan’s campaign rules limit what politicians can say (and what can be reported). ‘Bridges to nowhere’ may be music to the LDP’s corporate friends but they won’t boost private spending. Besides, Japan has a shrinking working population. With a likely kick-up in bond yields – unhelpful when gross debt is 200% of GDP – the increasing number of pensioners, ie those on fixed incomes, will be worse off. It is unfashionable to say so, but persistent deflation has actually increased the value of their savings.
In its emphasis on cyclical recovery the LDP is also ironing over problems that are more structural. The low level of women in the workforce; the lack of immigration, the excessive costs of distribution and; the use of product particulars to disbar competitor imports – such are the things that never, or no longer, get publicly discussed.
The next six months will be crucial. The Bank of Japan is doggedly independent. Unlike nearly every other central bank it has resisted calls to print money or flirt with fiscal policy. Chairman Shirakawa’s term ends in April. His replacement is likely to be more pliant. Upper House elections then follow in July. An LDP victory would make the government’s task easier.
The financial markets have given the LDP the benefit of the doubt. Since it became clear that Abe was its choice as leader two months ago, the yen has declined while stocks have risen on rising hopes for exporters. In the past, such movements would have triggered foreign buying (thereby causing the currency to rise). This is yet to happen. Then again, the global economy hardly supports stronger exports.
What if we discount politics altogether? This is what the unexpected strengthening of the bond market seems to be saying. And what then for the investment case for Japan?
This is perhaps a more interesting enquiry than seeking answers to a trading call. Japanese companies have continued to invest despite the rising real cost of money, a higher yen and serial disasters (both natural ones and those of their own making). Balance sheet discipline has gradually replaced over-investment: companies are throwing out cash. That has encouraged many of them to pay out more in dividends. With prices at undemanding levels, Japan is now in the once unlikely position of being a yield play of sorts.
At this point it is usual to contrast the fortunes of go-ahead exporters with that of hapless domestic companies. And indeed, the stories tend to diverge. But there are exporters losing their way: Sony or Sharp will soon be business school studies on how to misread changing consumer tastes; equally, we see companies like Fanuc (industrial robots) or Canon that just seem inexorably to consolidate their global leadership.
Domestically, success and failure also co-exist. There are value-destroying companies in the energy sector (step forward newly-nationalised Tokyo Electric Power…) that plough on, shielded from real-world things like competition (or making proper returns).
Yet there are companies such as Unicharm that operate relatively free of the heavy hand of regulation or which actually benefit from it, such as Japan Tobacco, and which are raising their profits. These are among the better known names.
On a case by case basis, therefore, Japan has merit. It’s just dangerous to suppose that elections will give a lift to growth.