Abe catalyst to rectify Japan stock market

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Richard Kaye, manager of the Comgest Growth Japan fund, comments on the mounting speculation that a snap election will be called in Japan.

Prime Minister Abe is a once-in-a-generation leader who intends to leave office only after he has radically changed the way Japan is governed, and removed decades of administrative clobber which impedes one of the world’s most resilient and resourceful private enterprise cultures.

Like his spiritual mentor Prime Minister Koizumi, Abe is at war with his traditionalists in his own party and with the bureaucratic establishment as much as with the official opposition. Like Koizumi, Abe’s instinct is to cut tax; but he accepted the VAT increase in April in a quidproquo with the establishment for a promise of a reduction in corporate tax, which is being delivered, slowly but steadily.

The potential of a snap election next month must be seen in this context. If, as likely, Abe holds his majority he will be unstoppable until December 2018, and strengthen his authority vis-à-vis the majority of LDP politicians who insist on a second VAT hike sooner rather than later. If after all he accepts a second VAT hike, he will not be obliged to execute that hike right before a general election, as the previous timetable dictated.

Just as with Koizumi’s August 2005 snap election about Post Office privatisation, Abe’s snap election will also muster popular endorsement of his radical program. Perhaps the most far-reaching feature of that program is the Trans Pacific Partnership (TPP) free trade agreement, which will remove protection on dozens of inefficient industries. Abe has signed the TPP but the Japanese Diet has not yet ratified it. It is also probably no coincidence that Abe chooses to refresh Japan’s legislature just the week after the US did, since congressional gridlock had complicated the US response to the TPP.

Koizumi’s August 2005 election triggered an eighteen-month bull market. Abe is following Koizumi’s handbook, and is even more the direct ally of the investor in Japanese Equities than Koizumi ever was. He has explicitly put faith in private enterprise to resuscitate growth, allocate capital and create jobs, and will remove any obstacles to that. Japan’s stock market has long traded at a discount to other developed markets, and Abe could be the catalyst to rectify that.

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