Forget Japan’s election: here’s what will really push stocks higher

published 22 July 2013

13-07-22-shinzo-abe — Abe: received a vote of confidence

The Japanese election results are in.The country was voting on seats in the upper house the equivalent of our House of Lords.

There were no major surprises. Japan's ruling party, the Liberal Democratic Party, won comfortably. It now controls both houses of parliament for the first time since 2007.

Prime minister Shinzo Abe has now received a firm vote of confidence from the electorate. They've had time to see Abenomics in action. And they like what they've seen so far. They've given him a licence to carry on.

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Here's why that's good news for investors in Japan

Japan finally might have a prime minister who lasts

With Shinzo Abe's party in control of both houses of the Japanese parliament, it'll be easier for him to pursue his political agenda without disruption.

It's not hard to see why this is good news for Japan. Abe is arguably the first successful prime minister they've had since Junichiro Koizumi, the flamboyant (by Japanese politicians' standards) former leader of the LDP who left office in 2006.

Japan could certainly do with some political stability. As the FT points out, up until now, the country "had cycled through six prime ministers in six years" (ironically enough, Abe was one of them he had a brief and disastrous stint in charge in 2007). But now, unless parliament is dissolved early, another national election is not due until 2016.

Better still, it means that Abe can carry on with Abenomics without the danger of his plans being derailed by the opposition. That's important. There's more to Abenomics than just weakening the yen via the central bank. The Japanese economy would also benefit from significant reform to the farming sector and labour markets.

It'll be hard enough to do that in the face of the nation's various vested interest groups - Japan's farmers are as bolshy and powerful a lobby as they are everywhere else in the world - without an uncooperative opposition throwing spanners in the works every five minutes. There's also the sticky question of getting Japan's nuclear power plants back on line.

Anyway what does it all mean for investors? Clearly Abe's election victory is good news. But it's also already priced in at this point. It didn't always seem like a done deal, but by the end of last week, no one was really in doubt he would win.

As he tries to push more reforms through, there will be more ups and downs politically. But for now, the first big hurdle is cleared for better or for worse, Japan has embraced Abenomics and it's not going to be rewound in the near future.

Companies are about to see the benefit of a weaker yen

The good news is, there's another catalyst for Japan's stock market to keep enjoying the good times. As Lex points out in the FT, earnings season for Japanese companies is almost here. One big influence on those earnings will be the weakening of the yen over the past nine months or so.

Big Japanese companies on average, expect profits for the quarter to the end of June to be up by about 25%, says Lex. But they have been very cautious on their currency estimates. Many are assuming an exchange rate of 90 to the dollar for the year. Yet "last quarter's average was almost 99".

Investment bank Nomura reckons that could give rise to profits growth of more like 40%. "That is the sort of scale that should produce upwards profits revisions just as earnings become the market driver."

It's a change of focus that should be good news for investors in Japan. Markets initially surged on the back of Abe-inspired exuberance. With Abe's political power now secure, this thrill of the new' factor will wear off.

But now some of the concrete effects of his policies are likely to come through in the form of pleasant corporate profit surprises and upgrades to forecasts. If there's one thing that markets like, it's when earnings beat estimates. So that should help the whole Japanese show to stay on the road.

It'll also help that the Americans are firmly behind Abe's desire to revive Japan's economy. Just last week, Federal Reserve chief Ben Bernanke defended Japan against suggestions that it is manipulating its currency to give its exports an unfair competitive boost.

"It's in our interest to see Japan strengthen. Japan is trying to expand its overall economy and therefore there is a benefit as well as a cost. That benefit is a stronger Japanese economy and a stronger Asian market."

Whether or not you like Bernanke's policies is by the by he's in many ways the most important man in the global economy, so if you're pursuing a controversial strategy, he's a valuable guy to have on your side.

We might not see the Japanese market continue surging at the rate it has over the past six months or so. But the next phase of the bull market should be less volatile and more durable.

Investors have certainly been willing to take a short-term punt on Japan based on money-printing, some encouraging political noises, and the instinctive drive to chase a rising market higher. But there's still plenty of scepticism about whether or not Abenomics can actually do the trick.

Once it becomes clear that Japan's economy is genuinely improving, the hardened sceptics might have to revisit some of their long-held assumptions. Then the Japanese bull market could really kick into gear.

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John Stepek is a senior reporter at Bloomberg News and a former editor of MoneyWeek magazine. He graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.