James Dowey, Investment Director & Chief Economist, Neptune Investment Management
Shinzo Abe’s LDP-led coalition won a big victory in Japan’s general election yesterday, securing 326 of the 475 seats in the Lower House.
This compares favourably to the 326 of 480 that it secured at the last election in December 2012, with recent boundary changes having eliminated five seats in the interim. Importantly from a market perspective, the coalition held on to its super-majority (of greater than two-thirds of the seats), which enables it to push policies through parliament more easily.
Investors hate uncertainty and, in particular, some were concerned about the possibility that Mr Abe’s coalition might lose its super-majority, so one would expect this positive result ultimately to be rewarded by the stockmarket. On Monday, the TOPIX actually fell 1.5% in yen terms but this should be evaluated in the context of Friday’s highly negative action in Western markets, which saw the FTSE 100 fall 2.5%, the S&P 500 fall 1.6% and the Euro Stoxx Index fall 2.9%. The TOPIX responded to these falls at the opening on Monday.
More broadly, the result has strengthened Mr Abe’s hand both by clearing the political road ahead until the next general election, in principle to be held in 2018, and, although voter turnout was very low, establishing a fresh public mandate for his government’s ‘Abenomics’ economic policies.
We have emphasised that these policies – especially aggressive monetary expansion and exchange rate depreciation – have the potential to boost Japanese equity prices much further over the next few years. And we are satisfied that the government and the Bank of Japan remain committed to their implementation. Given the crucial role of yen depreciation in Abenomics, from a UK investor’s perspective it is important to neutralise its effect on returns by hedging yen exposure, as we do at Neptune. We maintain a large, fully currency-hedged overweight in Japan in our Global Equity and Global Alpha funds, and high conviction in the pro-Abenomics, fully currency-hedged positioning of our Japan Opportunities Fund.
This election result clears the way for what we believe will be a good 2015 for our Japanese stocks. We believe that they will benefit from further Bank of Japan monetary expansion and yen depreciation; domestic economic growth acceleration from the current dip that was caused by the first stage of the VAT tax hike; and a domestic and global growth boost due to the recent large decline of the oil price.
The decline of the oil price is particularly beneficial to Japan given the rising energy import bill that, until recently, Japan has incurred as a negative side effect of Abenomics-driven yen depreciation. This side-effect has been particularly sharp given the context of Japan’s nuclear shutdown following the Fukushima nuclear disaster in 2011. Next year, however, will likely see significant relief in the Japanese energy import bill relative to 2014 owing to the lower average oil price, and, although politically sensitive, the likely restarting of the first nuclear reactors.