LGT: Abenomics enters second half-time Mittwoch, 25. November 2015 - 10:05
 |
After three years of “Abenomics”, Japan has reached important milestones and has taken strategic decisions. With prices, wages, and corporate profits rising steadily, the government’s focus should henceforth shift towards implementing structural reforms. Japan’s firms and households will thus increasingly start reaping the benefits of reflation. Thus, as long as the global backdrop does not deteriorate significantly, the outlook for Japanese equities will remain positive.
Please find below the market comment by Mikio Kumada, CIIA, Global Strategist LGT Capital Partners:
For more information please contact:
Roland Cecchetto oder Kim Ghilardi Communicators roland.cecchetto@communicators.ch
-------------------------------------------------------
Abenomics enters second half-time
After three years of “Abenomics”, Japan has reached important milestones and has taken strategic decisions. With prices, wages, and corporate profits rising steadily, the government’s focus should henceforth shift towards implementing structural reforms. Japan’s firms and households will thus increasingly start reaping the benefits of reflation. Thus, as long as the global backdrop does not deteriorate significantly, the outlook for Japanese equities will remain positive.
The media has recently reported that Japan slipped back into recession in the third quarter of 2015. Indeed, real gross domestic product declined again from the previous quarter, dragged lower by the notoriously volatile inventory cycle. It is thus factually correct to speak of a recession. Nevertheless, that actually only distracts from the actual story – which is that Prime Minister Shinzo Abe’s reflationary policies, known as “Abenomics”, are working according to plan.
Importantly, domestic prices of goods and services, as well as wages and corporate profits, are rising consistently for first time in decades. For instance, the year-over-year growth rate of Japan’s nominal GDP growth accelerated to 3.1% at the end of last quarter, from 2.5% three months earlier - and that’s after having been slightly negative on average in the two decades until the start of Abenomics in 2013 (see page 2). In short, NGDP is growing well above potential. That is important because it provides a favorable cyclical backdrop for pushing through structural reforms - to keep up the momentum, and boost the long-term real growth as well.
Difficult policy decisions were taken Looking back, in his first year in office, Abe had focused on relatively simple steps (regime change at the Bank of Japan, launching massive monetary expansion, shock-devaluation of the yen). In 2014 and 2015, more difficult issues were tackled. Unlike central banking, the other policy areas concern many power centers in industry, agriculture, or the bureaucracy - all of which must be brought in line first. It took some time and political capital, but Abe did ultimately prevail, winning all necessary contests, including two national elections, and an internal party vote. As a result, key policy parameters have been set:
Economic and market outlook remains benign Looking ahead, with no House of Representative elections due before 2018, the government can now focus on reform implementation. The recent giant initial public offerings of shares in the national post and postal bank, or legislation to improve female job market participation, represent initial examples. To avoid a loss of reform momentum in the longer-term, Abe could also begin work on a succession plan at some stage. Meanwhile, booming tourism and preparations for the 2020 Olympic Games should keep construction and investment going, with the occasional technological innovation providing a helpful extra boost to general sentiment. If needed, the BOJ would also further expand money supply, keeping the yen weak against some currencies, especially the US dollar.
Last but not least: these growth-friendly policies, combined with healthy corporate balance sheets, and still reasonable valuations, mean that Japanese equities have further upside potential. The Nikkei 225 may have risen by about 135% since its cycle low in 2012 – but it is still the only major equity index worth only about half as much as 25 years ago.
Charts and related background commentary: Japan's core inflation has remained positive despite the unexpectedly sharp drop in commodity and energy prices in mid-2014. The annual gains in the national consumer price index excluding food and energy have been positive in each and every month since September 2013 - after having been slightly negative for the most part in the previous 20 years. The commodity bear market has thus postponed, but certainly not cancelled, the attainment of the BOJ’s target of achieving a stable 2% inflation rate. As the following charts illustrate, Abenomics has had the desired impact on the broader economy, wages, and corporate profits (see PDF, page 2, graph 1+2).
Corporate profits also continue to increase unabated Corporate earnings also continue to grow on a broad basis, a trend backed by the government’s shareholder-friendly reforms. The chart below shows Japan operating earnings in yen, and the international earnings in US dollar. However, the gap between the two indices (MSCI Japan vs. MSCI All Countries World ex. Japan) is also visible if we translate all items into USD. Either way, it is worth noting that aggregate operating profits in Japan have continued to rise even after last year’s commodity price collapse, while there were reduced in all other markets (albeit temporarily, in all likelihood). Japan almost entirely depends on raw material imports, and therefore benefits more from lower commodity prices. The commodity slump also supports the objective to boost general wages (see PDF, page 2, graph 3).
Pleaase find graphs and charts in the PDF on pages 2 - 4.
|
