What will Abenomics be like without Abe
The commentary "Abenomics without Abe", by Sam Perry, Senior Investment Manager of Pictet Asset Management
Will Abenomics be able to survive after its creator leaves the scene?
Some investors have some doubts. When Prime Minister of Japan Shinzo Abe announced his resignation on August 28, shares plummeted and the yen rallied on fears that his economic revitalization program – a mix of ultra-accommodative monetary policy. , fiscal stimuli and structural reforms – can retire with him.
But these fears appear decidedly excessive.
Abe's policies are expected to continue regardless of who becomes the next prime minister , maintaining the conditions that had helped weaken the yen, strengthen Japanese exports and drive domestic equities 224% over the past eight years.
Of course, Japanese financial markets are set to be volatile in the coming weeks as the fight for Abe's succession intensifies. However, given the Liberal Democratic Party's firm majority in parliament, the new Prime Minister is unlikely to make drastic changes. In fact, candidates who propose continuity abound.
Chief suitors include Chief Cabinet Secretary Yoshihide Suga and Defense Minister Taro Kono, both strong supporters of Abe's policies.
Monetary policy is even less likely to change direction.
Renamed for a second five-year term ending in 2023, Bank of Japan Governor Haruhiko Kuroda will maintain the ultra-accommodative policy implemented shortly after Abe's appointment.
In an effort to defeat deflation, the BOJ boss pushed short-term interest rates to an all-time low of -0.1% and kept the 10-year bond yield at around 0%.
This does not mean that he will be completely inflexible: Kuroda is all too aware of the negative side effects of some of his policies, especially with regard to Japanese banks, which struggled to grow profits when the yield curve flattened. However, the reins of monetary policy will remain loose under his leadership and probably beyond.
Likewise, the next administration is unlikely to tighten the strings of the fiscal exchange. When Abe launched the nearly $ 1 trillion stimulus package to counter the coronavirus crisis, some ruling party members called for even more spending.
Furthermore, there will be no backtracking on Abe's path to improve the corporate governance standards of Japanese companies.
Japan's change in attitude and behavior towards ESG (environmental, sustainable and governance) factors has been truly amazing.
Abe's management and governance reforms may have been imposed from above, but they were enthusiastically received by shareholders and corporate managers.
And while the improvements in governance are still partial, the changes are happening at an impressive speed.
For example, the percentage of companies listed on the first section of the Tokyo Stock Exchange that have two or more external directors on their boards grew to 91% in 2018 compared to 18% in 2013. Domestic investors understand the importance of this change. Conversely, overseas investors, whose exposure to Japanese equities fell below 2012 levels, ignore this aspect of Abenomics at their own peril.
Following the introduction of corporate governance improvements, the RoE of Japanese companies doubled to 9.5% in 2018 compared to just 4% in 2012 (see chart).
Although the RoE in the United States is higher, the latter is fueled by debt. Japan Inc, on the other hand, continues to have abundant liquidity.
And in an abrupt hiatus from post-collapse illness before Abe, this liquidity has not stood still. Encouraged by Abenomics reforms, companies are looking to use their funds for growth and to improve shareholder returns. Long-term investors, therefore, should look beyond the political noise and focus on the structural changes that are happening in Japan.
Abe's departure will not slow this momentum.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/mondo/come-sara-labenomics-senza-abe/ on Sun, 27 Sep 2020 06:10:03 +0000.