Japan: Abenomics set for next stage as outbound M&A booms
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Japan: Abenomics set for next stage as outbound M&A booms

Tankan survey turns positive; largest buyer of southeast Asian companies.

Japan’s ambitious economic reform plan was given a boost last month as prime minister Shinzo Abe’s Liberal Democratic Party won an electoral majority in Japan’s influential upper house.

Some analysts said the result would allow so-called Abenomics to enter its next phase, with one terming what is to come as super-Abenomics. But others cautioned that Abe’s continuing popularity and ability to pursue more profound reform should not be taken for granted.

Most agree at least that reform effortswill be ramped up following the latest result.

John Vail, chief global strategist at Nikko Asset Management
John Vail, chief global strategist at Nikko Asset Management

According to John Vail, chief global strategist at Nikko Asset Management, the result should help drive individuals’ consumption and thus build wealth in Japan, while the greater confidence created in government stability could also help corporate capital expenditure and housing investment. Bullish

"In our view, Abe’s victory in the upper house is bullish for Japanese equities and the Japanese economy as a whole, as the removal of political headwinds bolsters the government’s ability to press forward with all ‘three arrows’ of its growth strategy," Vail says.

In fact, he adds, reform might now be even stronger than promised and undertaken with alacrity.

"We expect there to be other major reforms following the election, which may surprise the consensus," he says. "This may include allowing a gambling industry in Japan, approving large-scale resorts, and accelerating the restart of nuclear power plants."

Although Vail concedes that these are controversial issues, he says they are likely to have a positive effect on the economy and mark a transformation in Japan’s willingness to change for growth. "What is being done now in Japan hasn’t been attempted for decades; however, both within Japan and internationally, there is a growing belief that this could work."

Understandably, investors are somewhat sceptical. But there are signs that point to a real difference in Japan’s thinking.

"For instance, the five-year term of an activist Bank of Japan governor, after 15 years of conservative ‘BOJ men’, is not short-term change, and the significance of a popular prime minister injecting stability into Japanese politics, after a decade of revolving chairs and instability, cannot be underestimated," says Vail.

The mere fact that Japan is without a crisis of some kind is in itself a big change; in reality, though, this is simply a return to prosperous conditions.

Nikko’s view is that global investors should be seriously considering an allocation to Japanese equities. There are big opportunities afoot, as those that are stationed on the ground in Japan can testify. The question of structural reform happening is not an ‘if’, but a ‘how soon’.

There is a danger, however, post-election, that the popularity of Abe and his ability to pursue a still more ambitious reform agenda might be overstated.

Andy Seaman, partner and portfolio manager at Stratton Street Capital, sounds a note of caution, saying it is possible that the elections might mark the peak of popularity of Japan’s prime minister: "He won control, although perhaps not by enough to get the two-thirds majority needed to change the constitution, although Abe seems keen to pursue this."

Primarily, according to Seaman, labour market reform remains a difficult area. "Workers with lifelong employment contracts are getting wage cuts, as firms are reluctant to break the contracts, which is having a downward effect on demand. The younger generations are having difficulty getting jobs at all, and society is not entrepreneurial; people are ending up in temporary low-paid jobs."

Structural reform, Seaman adds, is crucial, very difficult, but much more important than changes in the money supply in the longer run. "Inflation is not an end in itself, and although the country is a large net creditor, resolving the government’s debt position also involves difficult choices that are likely to be delayed."

In sum, says Seaman, Abe’s mandate for change is remarkable, given how he lost power in the past. "We will see if he can deliver real substantive change over the next few months. Either way, if Abe makes changes, he will be unpopular with some, and if he does not he will be as well."

No doubts

Even before the election, the Japanese market had largely shaken off recent doubts over Abenomics. These doubts drove the Nikkei down 20% in three weeks in May to June, after surging more than 70% since the December elections that swept Abe back into office. The latest Tankan survey, an important gauge of large manufacturers’ sentiment, turned positive in the second quarter for the first time in two years, while private machinery orders – a reliable indicator of business investment – for May came in much stronger than expected.

And the value of mergers and acquisitions by Japanese companies of those in southeast Asia has reached $8.2 billion over this year to date, according to Dealogic, further demonstrating Japan’s relative strength on a regional and global basis. That makes Japan the highest single-country bidder for any southeast Asian companies.

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