What Abe’s Win Could Mean For Japanese Stocks [iShares MSCI Japan ETF, iShares Trust]

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December 16, 2014 1:55pm NYSE:EWJ NYSE:HEWJ

japanese GDP growthHeidi Richardson takes a closer look at Abenomics in light of the election and describes the implications for investors.


12.15_Japancity

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.

A Tricky Path Ahead

While Abe and his party now have the time and the mandate to implement their agenda, they will need to navigate the path ahead with care. I’m keeping my eye on two things. The first is the potential for “bad” inflation brought on by the plunging yen and rising import costs, which could curb spending. The second is Japan’s massive national debt, currently around two times GDP. Rates need to stay low, and the recovery to continue, in order for the country to service its debts. (See our interactive chart for more detail on the economy.)

That said, we think these risks are low, with more potential upside than downside. If you’re looking for a way to access the Japan market, consider iShares MSCI Japan ETF (EWJ) or its currency-hedged sibling, the iShares Currency Hedged MSCI Japan ETF (HEWJ).

Heidi Richardson is a Global Investment Strategist at BlackRock, working with Chief Investment Strategist Russ Koesterich. She also leads the iThinking initiative for iShares. You can find more of her posts here.


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