Janus Henderson: Japan Elections - What an Abe victory means
Prime Minister Shinzo Abe’s ruling Liberal Democratic Party (LDP) of Japan has emerged victorious in Japan’s October 2017 lower house snap election. The result exceeded expectations. On its own, Abe’s LDP secured more than half the number of lower house seats. As a coalition, two thirds of the total seats were taken.
This should provide some measure of stability to Japanese politics. And although Abe’s term as the president of LDP concludes in September 2018, the result of this election should strengthen his position within the party, and also result in a greater opportunity for re-election.
We believe this result to be a very positive outcome for Japanese equities. The immediate impact will be a decline of risk premium on economic policy, which emerged as the market’s key concern in summer this year. The government under PM Abe has adopted pro-capital market policy that is known as Abenomics. We expect this to remain in place. The market will interpret the victory as the continuation of the accord between the government and the Bank of Japan, Japan’s central bank. BOJ policy is very likely to continue to be accommodative. This is particularly important as it implies less risk for unwanted yen appreciation.
Fundamentally, the Japanese economy is doing well. We believe the economy has entered an autonomous growth phase. The unemployment rate is all time low and there is more than one offer for every job applicant. Household income has been increasing and consumption is growing. On the corporate side, industrial production has exceeded post GFC high and there is increasing demand for capital expenditure. The financial statements statistics of corporations by the Ministry of Finance shows that corporate profit is at all time high not only for large corporations but also for small businesses.
On the back of these factors, the TOPIX recently experienced a strong rally, delivering similar levels of returns in US dollar terms as the S&P500 on year to date basis. We believe the Japanese market is finally breaking upwards from the box range that had continued for almost two decades. On a year to date basis, small caps and thematic names had led the index. Going forward, with improved fundamentals as well as political visibility, we think the index should benefit from a rotation into large cap companies with good valuation support.