Japanese Prime Minister Shinzo Abe’s decision to dissolve the country’s lower house for a snap election on October 22 appears to have paid off.
His Liberal Democratic Party and its coalition partner Komeito retained the two-thirds majority in the lower house that secures them power. The victory helps pave the way for Abe’s fourth term as prime minister.
Abe called an election, nearly a year before his previous term of office had expired, in a bid to capitalise on an uptick in his approval rating after he took a more hawkish stance against North Korea and the precarious state of his opposition. His traditional opposition, the Democratic Party of Japan, is in disarray. Also, Tokyo Governor Yuriko Koike–widely considered to be Abe’s main challenger–decided not to run for parliament.
In our view, it was difficult for Abe’s challengers to claim he has failed on the economic front. Japan’s unemployment rate is at record low levels, and gross domestic product (GDP) has expanded for six straight quarters—the longest sustained bout of growth since before the global financial crisis.
What’s more, Japanese corporate profits have recently been rising faster than GDP, assisted by an undervalued yen. With the corporate sector generating positive cash flow, we think companies have room to boost capital spending and dividend payouts.
At the same time, Japan’s labour market has been tightening. We believe tighter labour conditions could help boost income and lead to increased consumption.
For these reasons, we think Japanese equities have the potential to do reasonably well and the domestic economy should continue to improve. Against this backdrop, we see select investment opportunities across a wide variety of Japanese sectors, including automobiles, electronics, factory automation, industrials, materials, oil and gas exploration, real estate and telecom.
In our view, Abe’s victory could lead to four more years of pro-growth policies and the possibility of a second term for the ultra-dovish Bank of Japan (BOJ) Governor Haruhiko Kuroda. We believe the near-term effect of more fiscal stimulus should be more positive for the economy.
That being said, Japan has relied heavily on massive monetary easing, central-bank balance sheet and asset buying, and an overarching policy of asset price inflation. The BOJ now owns two-fifths of the country’s sovereign debt and two-thirds of its domestic ETF market.
Although these purchases have been a pillar of support for Japanese equities and have kept the currency rate quite favourable, we believe this creates long-term challenges. In our view, it raises the risk of reduced liquidity and increased volatility at some point down the road.
The comments, opinions and analyses expressed herein are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or to adopt any investment strategy. Because market and economic conditions are subject to rapid change, comments, opinions and analyses are rendered as of the date of the posting and may change without notice. The material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment or strategy.
Data from third-party sources may have been used in the preparation of this material and Franklin Templeton Investments (“FTI”) has not independently verified, validated or audited such data. FTI accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user. Products, services and information may not be available in all jurisdictions and are offered by FTI affiliates and/or their distributors as local laws and regulations permit. Please consult your own professional adviser for further information on availability of products and services in your jurisdiction.
CFA® and Chartered Financial Analyst® are trademarks owned by CFA Institute.
Get more perspectives from Franklin Templeton Investments delivered to your inbox. Subscribe to the Beyond Bulls & Bears blog.
What Are the Risks?
All investments involve risks, including possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Special risks are associated with foreign investing, including currency fluctuations, economic instability and political developments.