Following Shinzo Abe’s return to power in last month’s election, the Japanese economy looks set for significant growth. Neil Newman analyses the political, social and corporate factors set to fuel a new Japanese boom
The past year has seen the unlikely event of the world’s leading five industrialized countries: France, Germany, Japan, the United Kingdom, and the United States, hold general elections. All of them gave us surprises and something to think about, even the usually dull Japanese general election signalled something of a shake-up in Japanese politics and will likely influence the next four years of the Abe Government.
The call for a snap election was expected with fragmented opposition parties and prime minister Abe taking the strategic decision to dissolve parliament. The low voter turnout on polling day was anticipated and Abe’s Liberal Democrat Party (LDP) and its junior coalition Komeito party won a “sweeping” victory, which the telephone polls accurately predicted.
However, the surprise came in how the weak opposition parties collectively took seats away from the ruling coalition, which ended up with a lighter presence in Parliament than they started with. The election also gave the Abe cabinet two new irritants for the next four years: Tokyo Governor Yuriko Koike promising accelerated reforms and no nuclear power and a re-energized Yukio Edano, the leader of a new opposition party the Constitutional Democratic Party.
The outcome of the election bodes well for the economy as fiscal and monetary policies are unlikely to change, though they may speed up under pressure from Ms. Koike and Mr. Edano. Indeed, the Bank of Japan announced from the latest board meeting that it was “business as usual”, meaning it would go against the global tide and stick with its easy money policy. The yen, although considered significantly undervalued, will be kept in check as a result, while interest rates rise overseas. Corporate earnings are at record levels again so far this year, particularly in the fields of robotics, electronics and machinery, and companies continue to add to bloated cash reserves.
It was a surprise then, that foreign investors immediately talked about selling Japanese equities. However, they’ve done this after every general election and it hasn’t stopped local investors, who were quick to state “it’s good for the stock market” and buying. The stock market went up for 15 days before the election and has continued solidly higher. Local investors are now talking of the Nikkei 225 returning to its all-time high of ¥38,957 – still some +74% away.
Land of the rising economic sun
Since the LDP win in the landslide election in 2012, which saw the start of Abenomics, the Japanese stock market has been the strongest performing major market globally with the Nikkei 225 index +126% and the broad Topix +120%. Unemployment has seen a dramatic fall to around 2.8% with a job-to-applicant ratio of 1.52:1. This was particularly noticeable among younger age groups and companies started to compete again for undergraduates. There is significant demand for bi-lingual staff as Japanese companies continue to look overseas to expand businesses as the domestic population ages rapidly.
Wages across the country are constantly reported to be slow to rise, but the competition in the inner cities in commerce, finance, IT and manufacturing industries is leading to significant jumps in pay. You may have worked for the same company for the past 10 years and seen less than a 10% pay rise, but changing jobs to a more dynamic firm will land you anything up to a 30% pay hike. The number of workers who changed jobs returned to the highest rate since 2009 indicting that the working population are becoming more confident about their future and relying less on “job for life” security.
Corporates have been amassing cash which the government is eager for them to spend, preferably on wages and investment in businesses. There is evidence this is now happening with small pay increases and a continuation of very heavy investment in R&D into fields that aim to deal with the aging population, in particular personal robotics. This includes autonomous vehicles, mobility devices and medical research not just in pharmaceuticals but in induced pluripotent stem (iPS) stem cell research to counter neural, optical and organ deterioration. The day when you return from hospital fitted with new retinas, in your autonomous vehicle, in time to carry your grandchildren to bed with a robotic exoskeleton, is not that far off. Japan, being the world’s first aging experiment, will first see technologies that are now being developed, while those they are already using will be exported to other nations as most of the developed world faces the same demographic cliff.
Broadly though, the outlook for Japan remains one of high stock prices and low yen volatility which favours both businesses and investors; increasing domestic consumption (particularly through internet shopping) and increasing wages. The economy is improving and so the impact of domestic corporate investment will fuel the next growth period for Japan and the expansion into new export markets. At some point the fiscal and monetary policy will change, either as Bank of Japan or Ministry of Finance targets are reached, or when the political leadership changes – but that is now a considerable way off and the momentum built up will continue to fuel the recovery.
Neil Newman is an analyst for Gavekal with over 30 years’ experience in Asian investments, having started his career with Japanese stockbroker, Nippon Kangyo Kakumaru in 1983. He has lived in Japan for a total of 17 years