Chief Investment Officer's INSIGHTS

27/10/2017

Japan: A re-rating story

Hans Goetti

Shinzo Abe cruised to a resounding victory in the Japanese national election with his Liberal Democratic Party (LDP) and coalition partner Komeito taking roughly two-thirds of the seats in the Lower House.

The Abe win has enormous implications. At a time when other parts of the world are mired in political uncertainty (US, Europe), there will be stability in Japan for at least four more years. This presents a good reason to expect a continuation of the asset price re-rating that has already been underway for the past few months.

The biggest implication is that the pro-growth structural reform drive will continue unabated. Abe has broken taboos with respect to imported foreign labour and enacting measures to bolster female labour participation rates. Another taboo may well be broken as nationalistic Abe intends to attempt to change the constitution in order to enable Japan to re-militarize. Such a move is likely to gain US support.

Abe’s victory virtually guarantees the reappointment of Kuroda as head of the Bank of Japan this coming April which means monetary accommodation will continue as core inflation is still far below target. This will put a lid on bond yields, keep the yen on the path of depreciation and will support further advances in Japanese equities.

Investment Implications

The Japanese equity market is trading 50% below its historical high which was reached almost 28 years ago, indicating that the equity price re-rating has still a long way to go.

A whole new equity culture is taking hold similar to that which ignited in the US in the early 1980s. A newfound emphasis on dividend pay-outs and improved corporate governance will greatly enhance the attractiveness of Japanese equity investments for years to come.

In terms of sector emphasis, Japan is at the cutting edge of robotics technology and large-cap Japanese industrial companies are heavily involved in the much-needed development of India’s infrastructure. Blue-chip electronics companies will be re-rated to include defense electronics as an expanding line of business.

Against the backdrop of stability, accommodative monetary policy, continued structural reforms, valuations and earnings growth, Japanese equities represent excellent value in relative as well as absolute terms.

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