Japan’s upper house election results confirmed that Prime Minister Abe’s Liberal Democratic Party, together with its coalition partner, New Komeito, won a majority that gives them control of both the lower and upper houses of parliament.
After several years of instability in Japanese politics and a succession of Prime Ministers this consolidates Prime Minister Abe’s position and provides the platform for structural change in Japan. Considerable uncertainty remains about the extent and effectiveness of the government’s growth strategy, but in our view it simply adds a potential positive to an already attractive investment story.
In our view, the fundamental reasons for being positive about the outlook for Japanese equities are valuations that are not stretched, despite the recent equity market rally, powerful earnings growth forecasts, healthy domestic economic growth, an accommodative central bank and a supportive external environment, led by continued expansion in the US.
Equity valuations for Japan’s Topix index, which are comparable to other developed markets on earnings measures, remain at a discount on asset based multiples and companies should see more than 55% earnings per share growth this fiscal year based on Bloomberg consensus estimates.
First quarter GDP growth of 4.1% annualised is likely to be followed by similar levels of growth in the second quarter and while growth may slow in the second half of the year it will most likely exceed growth in other developed economies quite comfortably. Core inflation in Japan was zero in May, with a return to positive territory forecast for June, but it remains some way below the Bank of Japan’s 2% target.
With progress towards 2% likely to be challenging, we expect the Bank to maintain an easing bias for some time to come and with the US Federal Reserve (FED) priming markets for the tapering of their own asset purchases this should see the dollar remain firm against the yen. While FED tapering has caused some volatility in financial markets, it is a signal of stronger underlying performance from the US economy and that is a positive development for Japan’s influential export sector.
Political stability is helpful for Japan’s financial markets and if the government succeeds with their growth strategy there should be positive long-term implications for Japanese companies and their investors. For now though, we believe there are a number of tangible reasons for a positive stance on Japanese equities beyond PM Abe’s growth agenda.
