Invest based on economics, not politics in Japan

Thought of the day

by Chief Investment Office 20 Sep 2018

With a decisive victory at the party leadership ballot box on Thursday, Japanese Prime Minster Shinzo Abe has solidified his grip on office and ensured continuity for his “Abenomics” brand of policy. Japanese equities have rallied into the vote result, with the Nikkei 225 and the TOPIX indices gaining 4.7% and 5.7% since 12 September, respectively.

Past periods of electoral clarity in Japan have led to near-term equity outperformance. But we see several reasons investors should not increase their exposure:

  • Higher taxes: A decision on hiking the sales tax in 2019 is due in December. With his political mandate renewed, Abe may feel more free to push forward with the tax hike. We estimate a higher VAT rate would cut household consumption directly by around JPY 4-5tn, or 0.9% of GDP, which would damage corporate earnings.
  • Slowing China: Key trade partner China is decelerating, with Chinese GDP forecast to slow to 6.5% this year and 6% next year. Japanese manufacturers and exporters that have integrated into the China supply chain will suffer, as well as firms that increasingly depend on Chinese consumption demand.
  • Trade and Trump: NAFTA and China may be keeping the White House busy, but Abe and Trump are expected to revisit bilateral trade irritants at next week’s UN summit. A risk-case 20% US tariff on Japanese auto imports could shrink GDP by an estimated 0.3-0.5%. Concessions to avoid this could include deregulation for the auto and medical sector, or politically sensitive agricultural imports.So while domestic political certainty in Japan is welcome, it should not be taken as a buy signal. We remain neutral on Japanese equities in our global tactical asset allocation.

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