The results of yesterday’s snap election in Japan came in largely as expected — with a decisive win that maintains, and potentially increases, the super-majority for Prime Minister Shinzo Abe and his Liberal Democratic Party (LDP). Abe called the election two years early and, despite extremely low voter turnout, his gamble appears to have paid off.
The victory now gives him a fresh, four-year mandate to implement his pro-growth policies, known as Abenomics, at a time when the country has slipped back into recession and struggles to escape deflation. It is also a clear message to the spending hawks in Japan’s Lower House (or Diet), who are looking to tame the nation’s astronomical debt sooner rather than later.
Corporate reforms should now continue
We’ve been bullish on Japanese stocks for some months, and the LDP’s win only strengthens our case. Despite a run-up in price this fall, we think Japan remains a relative bargain in the developed markets.
Of course, cheapness can also result in a value trap without a catalyst to turn things around. We see three such catalysts, essentially corresponding to the three arrows in the Abenomics quiver. We’ve seen the first two already at work in the form of unprecedented monetary easing by the Bank of Japan – one of the few major central banks still injecting liquidity – and a flexible fiscal policy via government spending.
The third – pro-growth policy leadership and structural reforms – may be the most important one going forward. Prime Minister Abe should now have enough political support to implement pro-growth policies, such as lowering corporate taxes, reforming the labor market and deregulating energy and farming.
In addition, there are other positive catalysts for stocks going forward. Japan’s giant pension fund has committed to doubling its allocation to stocks, which should result in a strong boost to flows. Companies are focusing more on raising shareholder return and are aggressively deploying cash — buying back shares and raising dividends to their highest level in six years. In addition, there is more merger and acquisition activity, better earnings, improved corporate governance and more women on the payrolls. At the same time, promised labor market liberalization should increase wages — and consumer spending.