Widely tipped Japan falls flat since start of 2018

Over the past few years there had been a growing excitement about the prospects of Japan.  

After two decades of seeming stuck in an economic malaise of slow growth, non-existent inflation, growing debt and increasing unfavourable demographics, the election of Shinzo Abe as prime minister in 2012, bought hope. Abe committed himself to a series of economic reforms, aimed at reflating and turning around the Japanese economy, dubbed Abenomics. 

In the autumn of 2017 investors turned even more bullish on the back of Japan’s strengthening economy and Abe’s snap election victory, seen as confirming Japan’s commitment to the road of economic reform.

This optimism over the country was clearly reflected in market returns.Since December 2012 (the month in which Abe was first elected), Japan has provided capital returns of 127.9 per cent in local currency terms, first among the seven other major regions in the chart below.

The optimism was also clear in returns for the past twelve months, in which capital returns, again in local currency terms, stood at 20.4 per cent. 

Returns cool in 2018 

Japan, though, has underperformed since the start of the year. As the table below shows, capital returns, dating from the start of the year, are negative. The country outperformed only the UK among other major regions. Sentiment towards Japan, it seems, is starting to reverse. 

One reason for changing sentiment in Japan is growing concern over the political fate of Abe, despite the confidence he inspires among international investors. In September he will have to face an election for party leadership, and there is speculation he will be unseated. 

‘Whereas Abe had looked like a shoo-in for victory a year ago, this now looks much less certain, especially as former PM Junochiro Koizumi has been critical,’ says Russ Mould of AJ Bell. ‘A succession of scandals, involving the cut-price sale of public land to a school connected to the PM’s wife and the resignation of the leading civil servant at the Finance Ministry amid sexual harassment allegation are hurting his approval ratings,’ says Mould.

Without Abe, the fear is, there is no Abenomics. ‘If the architect of Abenomics falls from office then the narrative could change completely,’ argues Mould. 

At the same time, the economic reform package is far from completed. Inflation figures in many sectors are still below target and public debt is still huge. ‘The loss of Abe would probably be seen as a destabilising factor for what has become a widely understood and increasingly appreciated story,’ says Mould.


Capital return, local currency terms

Since Abe (Dec-2012)

Japan

127.9%

USA

90.5%

Western Europe

48.9%

UK

30.5%

Asia Pacific ex-Japan

23.6%

Eastern Europe

-17.9%

Latin America

-17.9%

Last 12 months

Asia Pacific ex-Japan

21.4%

Japan

20.4%

Latin America

17.9%

Eastern Europe

15.4%

USA

15.2%

Western Europe

5.4%

UK

3.3%

2018 to date

Latin America

8.5%

Asia Pacific ex-Japan

0.9%

USA

0.7%

Eastern Europe

0.5%

Western Europe

0.4%

Japan

-2.5%

UK

-4.3%
Source:
Thomson Reuters Datastream.

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