The Liberal Democrat Party won the Japanese election by an overwhelming majority on Sunday. The return to power of a conservative administration was expected and although fund managers welcome the accompanying financial stimulus that will result, they warn political change will not act as a magic bullet.
Initial media reports showed the LDP won by a significant majority gaining 294 seats in the 480-seat lower house of parliament. The LDP led the polls in the run up to the election, with party leader Shinzo Abe campaigning heavily for fiscal stimulus and reform at the central bank to stimulate Japan’s struggling economy.
The Financial Times reports today that the incoming prime minister has already asked the Bank of Japan governor to set an inflation target of 2 per cent, higher than the current 1 per cent goal, as part of a more aggressive fiscal stance.
Japan was officially declared in recession again last week, the country’s fifth recession in 15 years, and fund managers support the calls for fiscal stimulus outlined by the LDP.
Schroders head of Japanese equities Shogo Maeda says: “The magnitude of the victory is a positive surprise to the market; the new government is regarded as more pro-business than the current government.”
“The biggest priority of the new government is to get the economy back on a growth track and to increase government spending on infrastructure, while applying more pressure on the Bank of Japan to ease further.”
Invesco Perpetual head of Japanese equities Paul Chesson remains optimistic about the short-term value that currently exists in the Japanese equity market despite having doubts about the long-term impact of the election on the economy.
He says: “While the change in political leadership may not be an enduring reason for market strength, we believe that it has highlighted the opportunities that exist within Japanese equities.
“Lowly valued cyclical companies have been the major drivers of the market’s short-term strength and our portfolios have been biased towards these sectors over the last two years on the belief that their valuation discounts to other areas of the market has been excessive, even amid a difficult economic environment.”
In our article looking at the potential impact of the general election last week, there was agreement that Abe’s plans for the economy could see positive changes for Japanese investments next year.
Skerritt Consultants head of investment Andrew Merricks explains his hopes for the LDP’s reforms.
He says: “We are quite bullish on Japan for the next year. That may be to do with a possible new Prime Minister who is hopefully going to appoint a new governor of the Bank of Japan. We’re hoping that will lead to actions that will weaken the Yen – that will help exporters and means that Japanese companies are looking quite cheap in relation to others.”
“On that basis, while there is quite a high risk, now is not a bad time to be putting money in Japan.”
Despite attempts to boost the economy by the LDP, Aberdeen Asset Management head of Japanese equities Chern-Yeh Kwok sees problems ahead.
He says: “The financial markets have given the LDP the benefit of the doubt. Since it became clear that Abe was its choice as leader two months ago, the yen has declined while stocks have risen on rising hopes for exporters. In the past, such movements would have triggered foreign buying (thereby causing the currency to rise). This is yet to happen. Then again, the global economy hardly supports stronger exports.”
“What if we discount politics altogether? This is what the unexpected strengthening of the bond market seems to be saying. And what then for the investment case for Japan?”
“On a case by case basis, Japan has merit. It is just dangerous to suppose that elections will give a lift to growth.”