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John Vail, Nikko AM

Super-Abenomics from Japan’s Election Result

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Global investors have been somewhat sceptical about the touted structural reforms in Japan and the ability of Abenomics to achieve its aims, says John Vail (pictured), chief global strategist at Nikko Asset Management…

At Nikko AM, we have been confident that this time it is indeed different for Japan and have commented widely on the topic. Now, with the result of the Japanese election providing prime minister Shinzo Abe with additional firepower to deliver on his goals, we believe Japan’s economy and the Japanese stock market will be major beneficiaries.

The outcome of Japan’s election (July 21, 2013), which has seen prime minister Shinzo Abe win control of the powerful upper house, will allow a “Super-Abenomics” strategy to be implemented, with the potential to take investors by surprise.

The election result should help drive consumer consumption and thus build wealth in Japan, while the confidence created in government stability may also help corporate capex and housing investment.

Thus, in our view, Abe’s victory in the upper house is bullish for Japanese equities and the Japanese economy as a whole, as the removal of political headwinds bolsters the government’s ability to press forward with all ‘three arrows’ of its growth strategy.

In fact, our belief is that reform will now be even stronger than promised and undertaken with alacrity, in what we call Super-Abenomics.

We expect there to be other major reforms following the election, which may surprise the consensus. This may include allowing a gambling industry in Japan, approving large scale resorts, and accelerating the restart of nuclear power plants.

Although these are controversial issues, they will have a positive effect on the economy and, significantly, they mark a huge change in Japan’s willingness to change for growth. What is being done now in Japan hasn’t been attempted for decades; however, both within Japan and internationally, there is a growing belief that this could work.

It is understandable that investors are somewhat sceptical. However, there are signs that point to the difference in Japan’s thinking. For instance, the five-year term of an activist Bank of Japan (BOJ) governor, after fifteen years of conservative “BOJ men”, is not short-term change, and the significance of a popular prime minister injecting stability into Japanese politics, after a decade of revolving chairs and instability, cannot be underestimated.

The mere fact that Japan is without crisis of some kind is in itself a major change; but in reality this is just a return to prosperous conditions.

While the consensus forecast for GDP in Japan for this calendar year is 1.8 per cent, we expect 2 per cent or higher, with more consistent growth to continue after that.

Our view is that global investors should be seriously considering an allocation to Japanese equities. There are major opportunities afoot, as those that are stationed on-the-ground in Japan can testify to. The question of structural reform happening is not an ‘if’.

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