Abe’s resignation is no game changer for Japanese assets
Shinzo Abe announced on 28 August that he would resign as Japanese prime minister on health grounds. Having become prime minister (for the second time) in 2012, Abe is the longest-serving premier in Japanese history. 4 Under Abe, the Japanese economy scored the longest streak of economic expansion in nearly three decades (Q1 2016-Q4 2017) and emerged from the deflation that had haunted the country since the mid-1990s. In our view, Abenomics has been a success overall, bringing more benefits than costs to the Japanese economy and society at large. There is no reason for Abe’s successor from the same ruling party to deviate from these established policy choices, at least in the short term.
The Japanese economy is gradually recovering from a record contraction in Q2. However, the path of recovery could be bumpy ahead, especially for household consumption and corporate investment. The rebound in exports could be sustained as global demand gradually comes back, but the recovery in household consumption and corporate investment may face more uncertainties. Our GDP growth forecast for Japan remains unchanged at -5.8% in 2020 and +2.1% in 2021.
Mr. Abe will be remembered not only for his role in reviving the Japanese economy but also in boosting Japanese equities. Indeed, the TOPIX index rose from mid-December 2012 to 23 January 2018 by a stunning 164% on a total return basis, i.e. an annualised increase of almost 21%. Although they have remained in a trading range since, the main driver for the 2012-2018 performance was the bold monetary policies launched by the BoJ, including its move to buy Japanese equity ETFs in 2016. Bold monetary easing by the Bank of Japan (BoJ) has been one of the key drivers behind the strong performance of Japanese equities since 2013. As long as the BoJ’s monetary policy stance remains unchanged, especially its direct purchases of equity ETFs, Abe’s resignation will likely have relatively little impact on Japanese share prices.
As mentioned, Abenomics has relied to a large extent on very accommodative monetary policies. Although we do not expect much change in fiscal and monetary policy following Abe’s resignation, the tight coordination between the two may become looser under a new government. That could relieve some of the downward pressure on the yen.
However, we do not see Abe’s resignation as a game changer for the yen. Monetary policy is already at the limit of what it can do and monetary easing globally since the covid-19 crisis no longer seems particularly aggressive. Our positive stance on the yen mostly rests on attractive long-term real rates, as inflation is structurally low in Japan. Coupled with a likely slowdown in the global recovery, we expect the foreign portfolio investment by Japanese investors that has recently weighed on the yen to decline.