Japan: more icing on an appealing cake

The prospect of more monetary easing after a snap election to be held in October is another dollop of icing on an already appealing cake.


Abe: a bold move to call a snap election
(Image credit: 2017 The Asahi Shimbun)

Shinzo Abe is clearly undaunted by the fate of the last sitting prime minister who decided to call a snap election. Japan's head of government announced this week that elections for the Lower House will take place on 22 October. For now, at least, the move bodes well for investors, says Leo Lewis in the Financial Times. A Goldman Sachs study of the eight previous elections shows that the broad Topix index rose during the 20 days before polling 88% of the time.

The medium-term outlook remains favourable too. The key consequence of an early vote is another tax hike on consumption. The Japanese equivalent of VAT remains low, and successive governments have planned to raise it to boost state coffers and clamp down on borrowing. The idea is to raise the tax from 8% to 10%. A previous increase in 2014, from 5% to 8%, dented consumption and sent the economy into recession.

It was the same story in 1997, when the tax climbed from 3% to 5%. This time round the contractionary impact will be tempered by Abe's new pledge to spend some of the proceeds on education and social security. But household spending is still likely to surge before the tax hike and slump afterwards, says Capital Economics. Consumption comprises around 55% of GDP.

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However, a downturn in the economy implies that the Bank of Japan would "have to do more for longer", says Jesper Koll of ETF providers WisdomTree Investments. Japan has already printed vast sums of money in an attempt to raise inflation and escape two decades of stagnation. Now it is likely to "stay hard on the accelerator" to temper a slowdown while the US Federal Reserve and the European Central Bank talk about gradually tightening monetary policy. That would make Japan look all the more appealing to liquidity-addicted global markets.

Additional quantitative easing also implies a further weakening in the yen, in turn bolstering profits at the exporters that make up much of the stockmarket. Moreover, the backdrop looks far stronger than when the consumption tax was last raised. Global growth has accelerated and a gradually tightening labour market has fuelled consumption. GDP expanded at an annualised 4% in the second quarter. Improvements in corporate governance, higher dividend payments and share buybacks are another reason to like Japan, as are still-reasonable valuations. The prospect of more monetary easing after this election is another dollop of icing on an already appealing cake.

Andrew Van Sickle

Andrew is the editor of MoneyWeek magazine. He grew up in Vienna and studied at the University of St Andrews, where he gained a first-class MA in geography & international relations.

After graduating he began to contribute to the foreign page of The Week and soon afterwards joined MoneyWeek at its inception in October 2000. He helped Merryn Somerset Webb establish it as Britain’s best-selling financial magazine, contributing to every section of the publication and specialising in macroeconomics and stockmarkets, before going part-time.

His freelance projects have included a 2009 relaunch of The Pharma Letter, where he covered corporate news and political developments in the German pharmaceuticals market for two years, and a multiyear stint as deputy editor of the Barclays account at Redwood, a marketing agency.

Andrew has been editing MoneyWeek since 2018, and continues to specialise in investment and news in German-speaking countries owing to his fluent command of the language.