By Simon Somerville
The tumbling yen may be reviving hopes of an export-led recovery for Japan but any sustainable improvement in the economy can only come from long-term structural reform.
With the US dollar now buying more yen than it has done in over four and half years, investors have been rushing to buy shares in Japan’s major exporting companies on expectation that profits and revenue will climb sharply as overseas demand for their products improve. It is quite likely that we will see Japanese exporters start to revise earnings and sales forecasts upwards over the coming months as the extent of the fall in the yen has, in my view, been much greater than anticipated.
The yen’s slump is perhaps the most visible result of what has become known as Abenomics – a series of stimulus measures introduced by Prime Minister Shinzo Abe to lift the Japanese economy out of recession and a period of deflation that has lasted nearly 15 years. When Abe spelled out his economic policy, he famously drew inspiration from a well-known Japanese legend – the story of the three arrows – to illustrate the need for coordinated action on three fronts: monetary, fiscal and structural.
By launching an aggressive monetary policy and boosting government spending, Japan’s prime minister has fired off two of his three arrows. Championing a 2% inflation target, Abe’s tough rhetoric on the economy, both during his election campaign and afterwards ignited the current rally in Japanese stocks. A stimulus package worth 10.3trn yen in January has underpinned it while the Bank of Japan’s massive bond-buying programme announced in April under the stewardship of Haruhiko Kuroda has prolonged it. Add to the mix, a series of tax breaks to boost wage growth and employment and you have all the ingredients that have propelled the benchmark Topix Index to its highest level since September 2008.
The rally is underpinned by increasing evidence Abe’s policies are having their desired effect. Household spending, for instance, rose at its fastest pace in nine years in March and tax-breaks aimed at encouraging companies to raise salaries should help sustain sales. That’s certainly the view of companies we met on a recent trip to Japan. Consumer products firms like cosmetics maker Pola Orbis, retailer Cocokara Fine and shopping centre developer and operator Aeon Mall all told us they were anticipating benefits from consumption spurred by wage growth. Japanese firms certainly seem to be heeding Abe’s call for higher wages.
The hunt for yield is a further consequence of the new measures brought in by Abe. With yields on Japanese government bonds effectively capped by the Bank of Japan’s massive monetary stimulus scheme, domestic investors will increasingly have to look elsewhere for a decent income stream.
Further gains for the Japanese stock market now lie in Abe’s ability to fire the third arrow of structural reform. Specific policies have yet to be announced but the key areas of focus are likely to be increased labour market flexibility, greater female and senior labour participation, trade liberalisation through membership of the Trans-Pacific Partnership and the creation of “national champions” through the relaxation of competition laws. If these structural reforms are even partially successful, it is not only individual companies that will profit but the entire domestic economy.
Simon Somerville is manager of the Jupiter Japan Income Fund
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