Japanese Prime Minister Shinzo Abe recently called an early snap election, resulting in a resounding win for his party (the Liberal Democratic Party). Abe’s party now holds a two thirds majority, thereby establishing an extremely stable government, allowing for continuity and a continued focus on economic policy.
Aside from maintaining ultra-loose monetary policy through ‘Abenomics’ (confirmed in the Bank of Japan’s most recent meeting), the government is also expected to announce a substantial fiscal spending package, amounting to around 0.5% of total GDP.
How did markets react?
Since he took office in 2012, Abenomics has spurred a more-than 20% decline in the Yen. Initial market reactions to this latest election anticipated unchanged economic policy, with the Yen sliding a further 0.2% versus the U.S. dollar. This slide in the currency consequently pushed the Nikkei 225 TR Index to its highest close since July 1996.
What does this mean for the Yen?
With a renewed mandate for QE, the Yen is likely to maintain its position as a structurally weak currency. This could potentially be exacerbated by increased policy divergence, should the US Fed become more confident on rising interest rates – pushing up the USD and weakening the Yen further, and, in return, boosting Japanese exporter earnings.
Jesper Koll, WisdomTree’s Head of Japan, and one of the foremost experts on the region, has forecast a USD/Yen exchange rate of 120-125 prior to year-end (relative to current level of ~113 as at 31st October 2017).
With this in mind, Japan-focused investors looking to fully benefit from a potential weakening Yen might want to consider being currency hedged.
Japanese Economy – Trade surplus leaps 38% YoY
Though inflation remains stuck below the BoJ target of 2% there is reason to be optimistic about the Japanese economy. Japan has enjoyed a strong run of growth in exports in 2017, with the most recent quarterly numbers showing an 18% jump on the previous year. This is the biggest increase in 4 years. For example, shipments of automobiles to the U.S. increased 28.3% and shipments of electronic parts to Asia rose 21.6%. Exports to China rose 25.8% YoY.
- Japanese equities continue to trade at attractive relative valuations, particularly compared to the US sharemarket – with the S&P 500 currently trading at a P/E premium of 20% to Japan’s TOPIX.
- On a price-to-book measure, compared to the MSCI World, Japanese stocks are currently trading at a 42% discount compared to a 20 year average of 32%.
- Since 1995, based on price-to-book, Japan has typically traded at a 12% premium to the MSCI Emerging Markets Index. Today, the TOPIX trades at a 22% discount.
Source: Bloomberg. Data as at 31st October 2017.
Japanese companies have demonstrated strong earnings growth – particularly relative to our own market here in Australia and the S&P 500.
Source: Bloomberg, BetaShares. Data has been rebased to 100 as at 31st December 2012. Past performance is not indicative of future performance.
All this considered, it appears to indicate a positive investment case for Japanese Equities.
The Japanese government remains focused on maintaining economic growth. And with inflation remaining subdued, current economic policy looks set to remain loose. Under this regime, equity multiples could expand further.
Japanese company earnings have continued to grow with the synchronised expansion of the global economy and, as an export driven market, they have historically been a major beneficiary of any positive momentum in the global economy.
However, we have also seen a fundamental shift towards better corporate governance driven by Abe’s government initiatives and legislation appearing to have a tangible effect – historically inefficient balance sheets have improved somewhat, while Japanese equity returns and dividend yields have demonstrated world leading growth as Japanese companies move towards global standards.
You can gain exposure to Japanese equities, particularly multinationals with exporting operations and offshore earnings, through the BetaShares WisdomTree Japan ETF – Currency Hedged (Ticker: HJPN).
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