Japan is entering a new era of “beautiful harmony”, says Justin McCurry in The Guardian. Japanese emperor Akihito abdicated this week in favour of his son, ending the country’s “Heisei” imperial era that began in 1989. Crown Prince Naruhito’s ascension to the Chrysanthemum Throne marks the start of the new “Reiwa period”, which roughly translates as “beautiful harmony”.
The outgoing era will not be fondly remembered by investors, says Tom Stevenson in The Daily Telegraph. Japan’s stockmarket bubble peaked in the first year of Emperor Akihito’s reign. After thirty years of “protracted deflation”, the Nikkei index is still valued at just over half its 1989 high.
Consumers put to the test
The “imperial retirement bash” means a ten-day holiday for citizens of the world’s third-largest economy, notes Pete Sweeney on Breakingviews. Retailers and travel agents are hoping that a nation of “workaholics” will take the opportunity to go on a rare spending spree. Brewer Asahi Group has even increased beer production in anticipation.
“If spending fizzes”, then policymakers will be reassured that the economy can withstand a 2% sales tax hike scheduled for October. “Everyone agrees that a higher sales tax is needed,” says The Economist. At 8% the current tax is low by international standards, and strained government coffers could do with a boost. The trouble is that a previous increase in 2014 “provoked a sharp downturn”.
Even if spending dips owing to the tax, however, the medium-term outlook for consumption, which accounts for roughly 55% of overall GDP is good. Unemployment stood at 2.5% in March, down from more than 5% at the start of the millennium and comparable to the rate in the early 1990s.
Low unemployment is “leading to real wage growth and rising consumer confidence”, says Stevenson. Reforms passed under Prime Minister Shinzo Abe have finally drawn the curtain on the “lost decade of deflationary stagnation”. Yet spooked by previous disappointments, “overseas investors were net sellers” of Japanese stocks last year.
An unloved market, however, is a cheap one. Market index provider MSCI reports that Japanese stocks are trading on 13 times trailing earnings, compared with a global average of 18. What’s more, says Mark Atherton in The Times, corporate governance has been progressively reformed, while Yuichi Alex Takayama of Nikko Asset Management notes payouts to shareholders are “thought to have doubled over the past five years”. Japan is moving in the right direction. Our favourite plays include the Baillie Gifford Japan trust (LSE: BGFD) and Fidelity’s Japan trust (LSE: FJV).