Japanese stocks still look cheap after Shinzo Abe's resignation

“The global fawn fest over Shinzo Abe’s departure takes the you-do-not-know-what-you-have-until-you-lose-it sentiment to new heights,” says William Pesek in the Nikkei Asian Review. If we take “brutally honest stock of all that Abe failed to do with his 2,800-plus days in power”, we see that just one of the three much-touted “arrows” that made up “Abenomics” was fired successfully. The Bank of Japan’s aggressive monetary policies helped deliver “the longest expansion since the 1980s” – although this failed to kick off “virtuous cycles of rising wages and consumption”. But the promise of pro-growth fiscal policies “fell to earth”, while that of massive deregulation “never got deployed”.

That may be too harsh, reckons Ma Tieying of investment bank DBS. True, annual GDP growth of 1% under Abe was only modestly higher than the 0.8% seen from 2000 to 2012. However, the “long period of political stability” (Abe became Japan’s longest continuously serving prime minister shortly before he resigned last week) at least “paved the way … to carry out some modest economic reforms”.

The concern for investors now is not whether the monetary and fiscal stimulus policies that the Abe administration has been following will change: “even without the Covid-19 pandemic, the authorities would not withdraw [these] anytime soon”. Rather, it’s whether Japan could “slip back into political paralysis or instability” with a return to the rapid turnover of short-lived leaders that preceded Abe. If so, this would present “challenges to push for further reforms to reinvigorate the economy”.

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Better governance and higher profits

Still, from an investor’s perspective, a lot of important work has been done – hence many analysts think that a period of uncertainty would be a good chance to buy, says Leslie Norton in Barron’s. Abe’s attempts to overhaul the economy “remained unfinished”, but efforts to improve corporate governance have made a difference. More than 90% of listed firms have more than one independent director, compared with 20% in 2014. And cross-shareholdings between companies are now under 10% of market capitalisation, down from 30% plus in the 1990s.

Meanwhile, “little noticed even by professional investors, Japan’s earnings-per-share growth has quietly beaten most global markets in dollar terms since Abe took office”, says Mike Bird in The Wall Street Journal. Corporate profit margins, which used to range between 2% and 4%, haven’t dipped below 5% in the past five years, “suggesting a secular break in profitability”. Yet the market still looks “comparatively cheap” alongside global peers, even taking into account the shortage of “mega-cap tech companies” and the excess of “chronically troubled financial firms” among Japanese stocks.

Add on companies’ habit of stockpiling cash, which helps them avoid dividend cuts or keep investing for growth in a crisis like this, and the bull case is clear, says Richard Evans in The Daily Telegraph. Consider buying the Baillie Gifford Japan Trust (LSE: BGFD): “it is, unusually, trading at a discount” to the value of its assets.