At the end of August, Japanese Prime Minister Shinzo Abe announced he would be stepping down from his role for health reasons.
As with any major political event, many were concerned about the impact on Japan’s economy this news could have, but this is particularly the case given Abe’s reputation as someone who was so focused on boosting it during his term.
The longest-serving PM of Japan, having served from 2006 to 2007 and again from 2012 until later this month, Abe is internationally recognised for his economic policies, nicknamed ‘Abenomics’.
Shinzo Abe is Japan’s longest-serving Prime Minister, his most recent term starting in 2012
His strategy has focused on monetary easing, fiscal stimulus and structural reform and has, on the whole, been largely beneficial for Japan and its economy.
Abe has encouraged investors to at home and abroad to buy into Japan’s stock market, spearheaded reforms to company governance, shareholder rights and dividends and tried to put a swing back in the step of the once might Japanese corporate world.
Japan has seen decent gains in his time in charge but remains tipped by some as one of the last remaining bargains for global investors. The question is, has Abe;s resignation changed all this or laid the ground for a brighter future?
We take a look at Abe’s legacy, how it’s performed and what we might expect going forward as the 65-year-old steps now and a new dawn rises on the country.
What is Abenomics?
In 2013, shortly after the start of his second stint at PM, Abe declared that economic revival and escaping deflation was ‘the greatest and most urgent issue’ facing Japan.
He introduced his strategy which consists of the so-called ‘three arrows’ of policy. The first is monetary expansion aimed at achieving 2 per cent inflation while the second is a flexible fiscal policy acting as an economic stimulus in the short term to achieve a budget surplus.
The third arrow is a growth strategy focusing on structural reform and private sector investment to achieve long-term growth.
Abe’s three-pronged policy package widely referred to as Abenomics – aimed to have Japanese domestic economy exit out of deflation as much as possible – has attracted global investors’ attention to investing in Japan’s equity markets over recent years.
How has it performed?
Abe’s policies have helped boost the economy in many ways. The exchange rate between the US dollar and Japanese yen rose from sub-80 yen level in 2012 to over 120 yen in 2015, and experts believe this will continue.
The weakening of the yen is seen as a key attribute in increasing Japanese businesses global competitiveness – and driving share prices higher.
Though the enthusiastic ‘Abenomics inflows’ seem to have ebbed away for now, foreign investors remain major buyers of Japanese equities and valuations have been stable in recent years.
Meanwhile unemployment levels have fallen by half during Abe’s second tenure in office, falling from 4.3 per cent in December 2012 to 2.2 per cent in December 2019.
Over the same seven-year period, the Nikkei 225 Index has risen from 9,737 in mid-December 2012 to 23,274 on 8 September 2020 – a rise of 139 per cent that matches the US S&P 500’s gain over the same period.
Inflation although still far from the central bank’s target, has at least been positive and kept deflation at bay.
Japan’s blue-chip indices the TOPIX and Nikkei 225 have returned more than 100 per cent since December 2012, the start of Abe’s second tenure as prime minister of Japan
What next for the economy?
There are multiple candidates reported to show interest in succeeding Abe, including Deputy Prime Minister Taro Aso, chief cabinet secretary Yoshihide Suga, and policy research council chairman Fumio Kishida
With these names in mind, on the whole, investment experts do not think Japanese equity markets will return to the pre-Abenomics doldrums.
Taizo Ishida and Shuntaro Takeuchi, fund managers at Matthews Asia, believe long-term stability is still expected for Japan, supported by currency levels, inflows of international capital and reasonable equity price valuations.
They said: ‘We expect the election of the new prime minister to be handled fairly smoothly and quickly, along with any regular, previously scheduled elections, and there is low probability that the future prime minister would radically change the current course of policies.
‘While Japan’s domestic economy is still in a recessionary environment amid the outbreak of Covid-19, we expect fiscal policy will likely continue as it has been thus far and remain more accommodative than other developed countries.
‘More importantly, monetary policy is still under the guidance of current Bank of Japan governor Haruhiko Kuroda, until his current term ends in April 2023.’
Dan Carter of Jupiter Asset Management agrees, a ‘political revolution is unlikely’.
He added: ‘Abe has long since ceased to be the totem of Japanese economic and market renaissance that he once was, so his departure is considerably less troubling than it would have been say five years ago.
‘For us Japanese politics has often boiled down to the old the cliché “same wine, different bottle”: the post-Abe era is unlikely to have a starkly different policy agenda, and an orderly transition from one Liberal Democratic Party grandee to another makes this truer than ever.’
Should you invest in Japan?
As with any major political event, there is likely to be some short-term impact as investors do not like uncertainty.
Janet Mui, investment director at Brewin Dolphin, said markets will be asking for more clarity on the policy stance of the new government and Abe’s successor, which there is a lack of detail for now.
Brewin Dolphin’s Mui said markets will need more clarity on the policy stance of the new government following Abe’s resignation
‘The budget position, high government debt and the balance sheet of the Bank of Japan may allow little room for the new government to push for very bold stimulus measures,’ she said.
‘So far the third pillar, which is the economic reform part of Abenomics, is lagging and there will be big questions on whether these crucial structural reforms will stall as a result.’
But overall, experts believe the case for Japanese equities is still a good one so investors shouldn’t fall foul to any knee-jerk reactions.
Richard Kaye, co-manager of the Comgest Growth Japan fund, said the opportunity for investing in specific companies in Japan remains one of the most interesting among major markets.
‘Japan has nearly 3,000 listed companies and many have proven their strength having survived all types of challenge: decades of currency appreciation, lack of natural resources, geopolitical risk, economic stagnation and Asian competition,’ he said.
‘In my view, Japan’s emergence from its twenty year hibernation has only just begun.’
Archie Ciganer, manager of T. Rowe Price’s Japanese Equity fund, added: ”As we look forward to the next stage of the equity cycle and the next evolution of domestic and international political governance, we feel Japan is a compelling active management case, given its under-owned and positive change dynamics.’
Top Japanese fund picks
Independent fund research ratings agency, FundCalibre, recommends the following Japanese investment funds and trusts:
Comgest Growth Japan
The ¥348billion (£2.4billion) fund managed by Chantana Ward, Richard Kaye and Makoto Egami, aims for capital appreciation over the long-term by investing in Japanese long-term growth companies.
It was launched in 2016 and has an ongoing charges figure of 0.92 per cent.
T. Rowe Price Japanese Equity
Archie Ciganer’s €1.5billion (£1.3billion) fund is benchmarked against the TOPIX and has an OCF of 1.77 per cent.
Its largest weighting is in telecommunications, media and technology, with 31 per cent of the fund in this sector, followed by industrials (22 per cent) and hardware (13 per cent).
Baillie Gifford Shin Nippon
This £563million investment trust has proven to be one of Baillie Gifford’s most popular in recent years. It has an OCF of 0.73 per cent.
Managed by Praveen Kumar, it invests in a mixture of listed and unlisted companies in Japan and has returned 174 per cent over the past five years.
Baillie Gifford Japan
Previously managed by star manager Sarah Whitley, the trust is now run by Matthew Brett and Praveen Kumar, but is still considered one of the leaders among the Japanese investment trusts on offer.
The trust has a yield of 0.42 per cent and OCF of 0.70 per cent. It focuses on Japanese companies which are believed to ‘offer good growth opportunities’.