Since its birth in 2012, Abenomics has been largely cheered by the financial community and hailed as a brainchild of Prime Minister Shinzo Abe, a man of the economy.
The portmanteau of Abe’s economic policy is based on the “three arrows” of monetary easing, fiscal stimulus and structural reform. Its concept is essentially a mix of measures designed to jolt the Japanese economy out of a decades-long deflationary slog.
Nearly five years later, it appears Abenomics has succeeded. Japan’s economy is on the cusp of inflation – we foresee 1–1.2 percent year-on-year inflation within the next 12 months (from 0.7 percent currently). It registered the sixth consecutive quarter of GDP growth in the second quarter, the longest unbroken streak in more than a decade; we expect another positive report for the third quarter due out on Nov 15.
Moreover, the Nikkei 225 is currently at an all-time high. These economic achievements have helped Abe weather a series of scandals and win big at the recent general election.
Yet, according to his campaign pledges, the prime minister seems set on spending his political capital on changing the constitution – to reclassify the country’s self-defense stance in Article 9, which defines Japan’s pacifism – rather than on pro-growth economic reforms.
Now that Abe’s party (the LDP) and its coalition partner (Komei) have secured a two-thirds majority in the lower house, we do not expect a dramatic fiscal expansion or painful (but necessary) economic reform/deregulation in the short to medium term.
The revision of Article 9 is a sensitive and controversial topic, and pursuing this path will likely lead Abe and his administration down a rocky road. Even with his post-election mandate, the prime minister is expected to face stiff resistance from the public and from opposition parties. Any changes to the constitution require a two-thirds majority from both houses and a standard majority from the public via a referendum, making Abe’s quest a difficult one.
Abe and the LDP have failed for years to achieve their longstanding ambition to modify Article 9, but this has not dissuaded them. Abe has said that he hoped to amend the constitution within three years, but has since backpedaled. The administration will very likely struggle to pass any meaningful changes as it becomes embroiled in a long, drawn-out process. This would consume Abe and his legislators’ attention, pushing Abenomics and important growth initiatives aside.
However, one economic measure that will proceed as planned is the value-added tax (VAT) hike. Scheduled for October 2019, the plan is to increase the VAT from 8 percent to 10 percent. The market assumed the hike would be delayed another couple of years, but after Abe’s landslide victory, it seems Japanese consumers are destined to pay more for their purchases. We think the higher VAT will ultimately hurt the economy, as consumer spending is almost guaranteed to dip following the hike’s implementation
Abe’s shift away from the economy, by prioritizing the revision of the constitution over painful (but necessary) reforms and his commitment to raising the VAT in 2018, could weigh on market sentiment in the long term. But in the short term, the election result and Abe’s forthcoming actions – i.e. a proposal for the supplementary budget of around 2 trillion yen by the end of the year and the likely re-appointment of Bank of Japan governor Haruhiko Kuroda – should buoy the domestic market.
We advise investors to focus on stocks that are likely to benefit from increased government spending on education and workforce training, key areas to be included in Abe’s budget proposal, as well as beneficiaries of the severe labor shortage and an improving inflation trend.
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