Investors seek to position themselves ahead of Japanese elections

Jonathan Boyd

With elections looming in Japan this coming weekend, a number of views have been put forward about the impact in different asset classes.

Peter Rosenstreich, Head Market Analyst at Swissquote, said that “while the LDPs approval ratings have dropped slightly there is still a chance Abe will add seats and reaffirm the populace support of ‘Abenomics’. We suspect that outcome of the vote is more predictable then current media hype, therefore traders should be long USDJPY”.

Russell Investments noted that equity investors have seen 10.2% returns from Japanese equities in 2014 to 9 December, as measured by the Russell Asia-Pacific Index.

Wouter Sturkenboom, Russell Investments senior investment strategist, said: “Recent political challenges for prime minister Abe in Japan create concern for us that the ‘third arrow’ of his reform program may be at risk. In addition, investors appear to still be viewing Japan as more of a short-term tactical trade, versus a longer-term strategic investment. Having said that, we do believe Abe has been able to maintain popularity and, despite recent challenges, has retained momentum for his reform agenda. Going forward, we are in wait and see mode on Japanese equities.”

Chris Taylor, head of Research & manager of the Neptune Japan Opportunities Fund said that the objective of the snap election is for Abe to gain election for the next four years, to put in place legislation relating to changing fiscal policy.

“The issue regarding Abe’s snap election is not whether he will retain his majority but how large it will be,” Taylor said.

“Since his initial electoral win in 2012, he has also gained a clear majority in the upper house, when last time it was only wafer thin. Then a supermajority of over two-thirds of the lower house was critical as it meant Abe could override the upper house to pass contentious legislation. Now a smaller majority is of far less political consequence. This means that once Abe is back in power, he is free to pursue the same three arrows policy but on an even more aggressive basis, with more frequent and sizeable interventions.”

Taylor is expecting the economy to regain momentum through 2015, helped by no increase in value added tax (VAT) until 2017, and factors such as the lower oil price. Japanese companies with exposure to the US and non-BRIC markets for their manufactured goods should enjoy faster growth in corporate profits, he added.