Abenomics is driving Japanese growth

January 19, 2018

Japan has recorded eight straight quarters of positive GDP expansion, its longest streak in 16 years, leading to sustained market growth. While the Bank of Japan jumpstarted its economy with significant quantitative easing measures, it has been Prime Minister Shinzo Abe’s structural reforms, aptly referred to as ‘Abenomics’, that are being credited with driving recent strength in the world’s third largest economy.

Under Prime Minister Abe’s control, immigration has increased significantly as Japan combats an aging population and naturally, a reduced labour force. Indeed, the number of immigrants living in Japan has nearly tripled, reaching 1.8% of the population in 2015 as compared to only 0.7% in 1980. Abe has also made a big push in getting more women into the workforce over the past few years, with belief that this will lift household income, leading to increased spending and overall economic growth. This Abenomics initiative is clearly working, with latest data showing the female participation rate has reached multi-decade highs of 51.5%, which is leading to a lower overall unemployment rate as well.

 

Source: Cornerstone Macro Research, January 2018

Most recently, PM Abe has introduced legislation that will lower the corporate tax rate to 25%, from around 30%, for companies that raise wages by 3% or more, again with the intention of boosting household spending. Japanese Financials will likely come out a big winner of this, as shown below. In other sectors, it comes down to the size of the company as many small businesses are already paying less than a 25% tax rate, making the initiative irrelevant. It is expected, though, that many large- and mid-size firms will take Abe up on his offer, and should be supportive of higher corporate profits.

 

Source: Cornerstone Macro Research, January 2018

In their most recent outlook, the AGF Asset Allocation Committee further increased their conviction towards Japan to a maximum overweight position, supported by these reforms and several others. Since its inception in late-2012, Abenomics has been successful in easing financial conditions, increasing corporate profits and in turn, offering attractive investment opportunities. While Japan does face risks related to stubbornly low inflation, slowing growth in China (a major trading partner) and ongoing uncertainty in nearby North Korea, we continue to watch for Japan to lead market growth in the near-term.

 

 

Commentaries contained herein are provided as a general source of information based on information available as of January 15, 2018 and should not be considered as personal investment advice or an offer or solicitation to buy and/or sell securities. Every effort has been made to ensure accuracy in these commentaries at the time of publication; however, accuracy cannot be guaranteed. Market conditions may change and the manager accepts no responsibility for individual investment decisions arising from the use of or reliance on the information contained herein. Investors are expected to obtain professional investment advice.