Abenomics without Abe
Why the departure of Prime Minister Shinzo Abe will not hamper Japan's economic and corporate renewal
Written by
Sam Perry
Senior Investment Manager
Can Abenomics survive the departure of its architect?
Some investors have their doubts. When Japan’s Prime Minister Shinzo Abe announced his resignation on August 28, stocks tumbled and the yen surged on concerns the economic revitalisation programme he forged – a combination of ultra-easy monetary policy, aggressive fiscal stimulus and structural reforms – might retire with him.
But those fears look wide of the mark.
Abe’s policies should live on no matter who becomes the next prime minister, keeping in place the conditions that have helped weaken the yen, boost Japan’s exports and lift the country's stocks by 224 per cent in the past eight years.1
Of course, Japan's financial markets are bound to be volatile in the coming weeks as the battle to replace Abe intensifies. However, given the ruling Liberal Democratic Party's firm majority in Parliament, it is unlikely the new PM will push for drastic changes. Continuity candidates abound.
Among the main contenders are chief cabinet secretary Yoshihide Suga and defence minister Taro Kono, both of whom are strong supporters of Abe’s policies.
Monetary policy is even less likely to change course.
Reappointed for a second five-year term which ends in 2023, Bank of Japan governor Haruhiko Kuroda will retain ultra-loose monetary framework he put in place soon after Abe recruited him.
In his bid to defeat deflation, the BOJ chief has guided short-term interest rates to a historic low of -0.1 per cent and kept the 10-year bond yield at around zero per cent. That's not to say he will be completely inflexible. Kuroda is only too aware of the negative side-effects of some of his policies, particularly on Japan's banks, which have struggled to boost profits as the yield curve has flattened. Even so, the monetary reins will remain loose under his tenure and possibly beyond.
The next administration is unlikely to tighten the fiscal purse strings either. When Abe launched a nearly USD1 trillion stimulus package to battle the coronavirus crisis, some ruling party lawmakers were calling for even higher spending.
There will be no going back on Abe’s drive to improve corporate governance standards of Japanese companies. ... changes are happening with remarkable speed.
Also, there will be no going back on Abe’s drive to improve corporate governance standards of Japanese companies.
The change of attitude and behaviour of Japan Inc towards Environmental, Sustainable and Governance (ESG) factors has been truly remarkable.
Abe's stewardship and governance reforms may have been top-down, but they have been met with enthusiasm by shareholders and corporate management.
True, improvements in governance are a work in progress. Yet changes are occurring with remarkable speed.
For example, the ratio of companies listed on the Tokyo Stock Exchange’s first section that have two or more external directors on their board rose to 91 per cent in 2018 from 18 percent in 2013. Domestic investors understand the importance of this shift. Yet foreign investors, whose allocation to Japanese stocks have fallen to below 2012 levels,2 ignore this aspect of Abenomics at their peril.
As corporate governance improvements have taken hold, Japanese companies' return on equity doubled to 9.5 per cent in 2018 compared with just 4 per cent in 2012 (see chart).
Kaizen spirit
TOPIX return on equity
While the RoE in the US is higher, that is fuelled by debt. Japan Inc, by contrast, remains flush with cash.
And in a sharp break from the post-crash malaise before Abe, this cash is not sitting idle. Spurred by the reforms of Abenomics, companies are looking to use their funds for growth and for boosting shareholder return. Long-term investors, therefore, should look beyond the political noise and focus on structural changes happening in Japan.
Abe's departure will not slow the momentum.
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