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Is Abe able? Managers and insiders react to Japan election

Is Abe able? Managers and insiders react to Japan election

Sam Perry

The Citywire Euro Stars AAA rated manager of Pictet's Japanese Equity Opportunities fund was sceptical of the difference Abe could make to Japan's economy, calling his election 'a bright new dawn, just like the last one'.

'In monetary policy, Abe started the campaign by making some truly wild statements (unlimited monetary easing, direct underwriting of government bonds by the Bank of Japan), most of which would require the rewriting of at least the Bank of Japan Act if not other legislation.'

'Significant change in the Bank of Japan’s policy stance is unlikely until April when the term in office ends of the current Governor, Maasaki Shirakawa.'

'On Monday the Yen sold off but then strengthened again and was little changed by noon GMT, the equity market rose less than 1% and JGBs were unchanged. Part of this will be selling the news after buying the rumour and part will be a recognition that many of the things that Abe campaigned on will either take time to implement or were just campaign rhetoric.'

'Fundamentally though, we must recognise that while there are some good proposed policies (corporate taxation, nuclear power), there are also plenty of bad ones (foreign relations, government debt).'

'Lest we get too carried away in hopes of a new dawn led by a re-energised LDP that has united a nation, it is worth noting two points. Firstly, there was a 10% drop in turnout to a post-war low of 59%.'

'Secondly, in this landslide victory the LDP received about 28% of the proportional representation vote. This is a an increase – compared to their landslide loss in 2009 – of just 1%. Given that there was a 10% lower turnout on Sunday, then the LDP received less PR votes in this victory than they did in 2009’s defeat. “A plague on both your houses”, indeed.'

Karel van Wolferen

Japan insider and Citywire's keynote speaker in Berlin 2012, professor Karel van Wolferen, is concerned that incoming prime minister Shinzo Abe has been saying contradictory things about controversial issues:

1) China

'What Washington did by overthrowing the first cabinet was to create a vacuum where foreign policy existed and that left a lot of room for political mischief.  The islands dispute is very serious. The outgoing prime minsiter really made a mess of it by mis-calculating how far he could go. The Chinese are very upset.'

'This is a tricky thing and Abe will have to play it very carefully, but there is now a lot of pressure on him not to be careful as many right-wing types surround him. We get the feeling that he does not have very wise councillors.'

2) Stimulus

'It is likely that the money that is necessary to re-invigorate the economy after the tsunami will now go in the wrong direction. Because there has been no sufficient political steering going on, it is likely to go to the old targets - what we call 'pork barrel spending' - unnecessary tunnels and bridges. We don’t know that Abe has the understanding that this type of spending won’t help Japan in any way.'

3) Career officials

'Why did alternative parties crop up in the first place? To establish control over Japan's career officials. The last prime minister was captured by the very beaurocrats he was supposed to lead somewhere. Abe needs to watch out.'

4) Deflation

'There will be more talk of beating deflation which in itself is not such a terrible thing. It is portrayed here as something pretty awful but what is not remembered is that Japan borrows from itself so the comparisons with Greece that we hear here are totally ridiculous.'

Andrew Rose

Citywire AAA-rated manager of Schroders' Tokyo fund expects a short term equities rally to continue probably for the next quarter:

‘The election is positive for the cyclical development of Japan. The market has rallied since the election was called and the good news should last beyond the next few days for the next quarter.  While Abe’s victory was largely expected, the landslide nature of it was not. This means that for the first time in 10 years the LDP has a huge majority in the Lower House and will ultimately be able to use its majority to overturn any opposition to its pro-growth strategies in the Upper House.

‘All eyes remain on the election of a new BoJ head in April, but with Abe’s majority, we expect him to get a reasonably pro LDP guy in the position. The market still looks weak and fundamental structural issues remain, but maybe this will be the specific catalyst to help the Japanese market.’

Chern-Yeh Kwok

The head of Japanese Equities and manager of the Aberdeen's  Japanese Equities and  Japanese Smaller Companies funds remains concerned  over Japan’s long term structural issues and despite fighting words from Abe on boosting inflation and growth, he thinks many of the problems remain too great for a quick fix solution:

‘Abe has campaigned for an end to deflation and has also promised a robust defence of Japanese claims to the disputed Senkaku islands – the cause of a diplomatic rift with China and wildcat strikes against Japanese corporates on the mainland. The odds for any kind of economic turnaround are not in Abe’s favour. With the country now in its fifth recession in 15 years, and having shrunk in the past three out of four years, gloom is like permafrost. The post-tsunami spending recovery never happened.’

‘In its emphasis on cyclical recovery the LDP is also ironing over problems that are more structural. The low level of women in the workforce; the lack of immigration, the excessive costs of distribution and; the use of product particulars to disbar competitor imports – such are the things that never, or no longer, get publicly discussed.

Jeffrey Atherton

The co-manager on the GLG Japan CoreAlpha fund sees an end to long-standing political gridlock:

‘Right at the top of Japan we are seeing a changing view on deflation that for a long time has been seen as a good thing. It’s now recognised that the environment is threatening businesses.’

‘This has been a landslide election and it’s important that the government can do now what it has wanted for a number of years where Japan has been deadlocked under an anti-business and quite socialist party. We think that part of this will come from corporate tax cuts and a much more aggressive monetary policy.’

‘The yen is still the major problem for companies and currency is the key to help the economy and stop jobs from going outside of Japan. It’s quite easy for the government to intervene on monetary policy but the inflation target will take some time to take effect and it will be a while before we know whether it has been successful.’

‘The sectors we think will benefit most from a weaker yen will be electronics, steel and chemicals. A much stronger yen against the Korean Won since Lehman has been devastating for these stocks.’

Ruth Nash

The Citywire Euro Stars A-rated co-manager on the JOHCM Japan Retail fund is confident Abe will deliver on his election rhetoric:


‘We think this is a net positive for the markets and expect this to boost equity markets across the board. Whether they can achieve an inflation target of 2% isn’t given but as long as they are travelling in that direction, we can expect a much lower yen which will again help exporters that have otherwise been struggling.’

‘The election has promised a much looser monetary and fiscal policy which puts Japan on a different path to other developed economies. From Japan I think we can expect the loosest monetary policy as other developed economies are going through fiscal tightening.’

Dan Carter

Deputy manager to Simon Somerville on Jupiter's  JGF Japan Income fund has his eyes firmly focused on the election of the best central bank governor:

‘Before the election [Abe’s] pro-growth policies were popular and the landslide result means his policies are very popular politically so he should be able to push through some of his changes.'

'The next big thing now will be the April BoJ election but he should be able to get a pro-inflation guy in the position. Over recent weeks we have been gently increasing our exposure to quality exporters which should be able to benefit from a slightly weaker yen. We expect the yen to be range bound between 80- 90 yen to the dollar. We will also look to increase our weighting to banks as they will be able to benefit from any inflation that comes through as a result of further QE.'

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