Japanese stocks still look cheap after Shinzo Abe's resignation

Japan’s longest ever serving prime minister, Shinzo Abe, has resigned on health grounds. We’ve written about Abe and his three arrow reforms – bold fiscal policy , expansionary monetary policy and structural reform – many times over the years. It hasn’t worked out perfectly (what does?) but his leadership has seen Japan make real progress (in the structural reform bit at least).

It is hard to imagine these policies being enthusiastically reversed – particularly given that Abe’s successor will almost definitely come from the ruling LDP party. Very easy monetary policy and massive fiscal stimulus is now the global norm. That Japan was first into it is hardly evidence it will be the first to have a go at finding its way out (not everyone agrees by the way.

We would expect fiscal and monetary policy to stay pretty aggressive (the budget deficit may be obscene but the Bank of Japan will be keeping interest rates very low) and for all the attempts to improve corporate governance and so on to continue. Expect tweaks, but not much more.

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In the shorter term, Japan looks like it will have a reasonably strong third quarter – daily Covid cases are falling; restrictions are being relaxed; mobility is back up with online routing requests back at pre-pandemic levels (thanks in part to the domestic tourism “Go to Travel” campaign); and the government has announced that over 98% of households have received their ¥100,000 (£700) cash handout. Hopefully they will get out and spend it – retail spending rose 13% in June and new car registrations were up 20% in July, notes Capital Economics, so they are clearly in mood.

Industrial production also looks to be coming back nicely – Capital Economics has pencilled in a 5% rise in production in July and 6.5% fall in GDP over the full year (not bad under the circumstances), but given Japan’s strong corporate balance sheets, good virus control and lack of dependence on overseas tourism that might be pessimistic.

If the change at the top – and the scramble to replace Abe – means the market sells off properly (equities were down 1.6% at their worst today), I’ll be buying more Japan in my Sipp. Few markets are cheap in absolute terms at the moment but Japan remains relatively inexpensive on most measures (cyclically adjusted P/E ratio and dividend yield in particular) and offers the now unusual prospect of long term rises in the dividend payout ratios. A key number to remember is that in July this year 56% of Japan listed companies had net cash. Only 16% of those in the S&P 500 did. In this environment, most other things being equal, which would you rather hold?

Value investors looking at Japan, try the AVI Japan Opportunity Trust (LSE: AJOT). Growth-orientated investors might look at Baillie Gifford’s Japan Trust (LSE: BGFD).