Japan’s policy options
Prime Minister Shinzo Abe’s reflationary policies have done much to improve the outlook for Japan in recent years, and our research suggests that ‘Abenomics’ still has legs. We believe that Mr Abe views the Nikkei stock index as a key barometer of his administration’s success and a basis for his popularity. Supporting the stock market is therefore likely to be a priority, in our view.
The government has several policy options, including measures for public pension funds and Japan Post to increase their allocation to equities, as well as another supplementary budget before the upper house election this summer. There is also room for the government to postpone an increase in consumption tax scheduled for 2017, particularly if global equity market volatility continues.
Significantly, the Cabinet has begun discussions on greater openness to foreign workers, especially in industries such as nursing care for the elderly (an important priority with Japan’s aging demographic profile) and childcare to help increase female participation in the workforce. Allowing more foreign workers into Japan would be an important and timely supply-side reform as Japan’s labour market continues to tighten.
Prospects for 2016
Looking ahead, it is true that China’s deceleration is likely to have spillov
in deposit rates to near zero, and there is talk of banks charging institutions and corporations for large savings deposits. These moves may incentivise managements to put their surplus cash to work, such as increasing capital expenditure, raising dividends or embarking on share buybacks. These are compelling options, given the growing emphasis on corporate governance.
We also see potential in certain investment themes, including inbound tourism – which has significant government support. This is a theme that we believe could have a long runway for growth, even with the slowdown in China. In 2014, 2.4 million Chinese tourists visited Japan. In 2015, that figure reached 5 million, but this only represents a tiny fraction of more than 100 million Chinese outbound travellers.[1] It is still less than half the number of Chinese travellers to South Korea in 2015, and significantly less than those going to Thailand or Taiwan. Now that Japan’s ‘gates are opened’, we see scope for this to change. Equity portfolios can gain exposure to growing visitor numbers via the hospitality industry or through real estate; our focus is on companies likely to benefit from higher tourist spending.
That said, the negative interest rate policy (NIRP) has weighed on the banking sector recently, as investors have been concerned about potential pressure on margins. The policy has very different implications, of course, within financials; domestically-focused banks may be negatively affected, while asset managers and brokers might be beneficiaries if the NIRP drives investment into higher risk investment strategies. We are in the process of researching the implications for the industry more fully.
