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Parliamentary Gains Boost Abe's Chances Of Delivering Reforms - Wealth Managers

Tom Burroughes

23 July 2013

The victory for Japan’s governing Liberal Democrats in the upper house of the parliament reinforces the moves by prime minister Shinzo Abe to drive through reforms, adding to bullish sentiment on the economy and market, wealth managers said.

On Monday, the Topix index of equities rose by 0.4 per cent to 1,216.53 at the close of trading in Tokyo. Volume was about 18 percent below the 30-day average. The Nikkei 225 added 0.5 percent to 14,658.04.

Last week, UBS Wealth Management, in a note on the elections, said a victory will bolster Abe’s ability to push his policy mix of quantitative easing, fiscal expansion and supply-side reforms.

The Swiss bank said Abe is likely to focus on a consumption tax move and social security reform, among others.

“Although it is still too early to expect a rise in Japan’s long-term growth trend from its current 1 per cent, it should be noted that there will be no new national election until 2016. We expect a stable and “untwisted Diet dominated by the LDP and New Komeito to implement steady economic and fiscal reforms,” the UBS note said.

Investors have been upbeat about Japan since last year’s election of Abe and his move to dramatically loosen monetary policy; despite wobbles, the change has set the Japanese stock market on a bull run, while hitting the yen. A few days ago, the monthly Merrill Lynch poll of global fund managers found that in July, hunger for Japanese equities has risen, as July’s net 27 per cent overweight is up 10 points from last month, the biggest rise of any major market.

At Schroders, Shogo Maeda, head of Japanese equities, was upbeat.

“Results from Sunday’s upper house elections in Japan appear to be a vindication of Prime Minister Shinzo Abe’s economic policies. With Mr Abe’s Liberal Democratic Party taking 65 of the 121 upper house seats, his coalition government now has a comfortable majority in both houses of the Diet – a first for a Japanese Prime Minister in six years. The previous deadlock in parliament has been viewed as a key reason for the country’s merry-go-round of prime ministers, with the post changing hands six times in as many years,” Maeda said.

“Firstly, this should allow Abe to focus on implementing his growth strategies, which also means he looks set to be more outspoken in pursuing pro-business policies. More importantly, a stable and longer-lasting administration has been established and this should enable more coherent economic policies to be carried out. Finally, Abe is likely to be patient in pushing forward an issue close to his heart – that of revising the Japanese constitution.  

Maeda said investors have already priced in the planned rise consumption tax to 8 per cent from 5 per cent.

“Another test of Mr Abe’s determination to drive through reform will come through negotiations to join the 11-nation Trans-Pacific Partnership (TPP), a proposed free trade zone. With regards to his growth strategy at home, we believe he will prioritise speed and practicality, focusing on measures that can be realised quickly. As for the most difficult structural reforms, these will have to wait as they may not necessarily deliver substantial gains considering the intense political bargaining required,” he said.

Over at Invesco Perpetual, Paul Chesson, head of Japanese equities, struck a cautiously optimistic tone about the parliamentary result.

"Considerable uncertainty remains about the extent and effectiveness of the government’s growth strategy, but in our view it simply adds a potential positive to an already attractive investment story...the fundamental reasons for being positive about the outlook for Japanese equities are valuations that are not stretched, despite the recent equity market rally, powerful earnings growth forecasts, healthy domestic economic growth, an accommodative central bank and a supportive external environment, led by continued expansion in the US," he said.