Is the referendum on Abenomics an opportunity

Added 12th December 2014

Japan goes to the polls on Sunday with fresh downgrades to measures of the country’s economic performance weighing heavily on voters’ minds.

Is the referendum on Abenomics an opportunity

Prime Minister Shinzo Abe’s attempt to renew and strengthen his mandate to reform the country in ways which he and his advisers believe will return it to economic good times is set to be a defining test.

Polling data and the weakness of the oppostion suggest Abe will get over the line. However investors should not be complacent as any result other than a resounding victory could set the country back many years. There does not appear to be a credible plan B if ‘Abenomics’ is not fully backed by the people.  

Those of a particularly cynical disposition could take the view however that given the recent direction of travel, Abe called the snap election because he wanted to secure power while he was still polling well enough, before a deep recession set in.

The annualised GDP fall last quarter was downgraded to 1.9% from an already concerning 1.6%, which is a significant movement and further prompts the question of whether a temporary blip has hit or a deep slide is beginning.

The consensus among experts on Japan seems to be that the country has hit a manageable rocky period as it waits for Abe’s policies to filter down to the real world, rather than entered a new long-term downward spiral after a brief respite.  

Japan’s main equities index has had the proverbial rollercoaster year, perhaps reflecting how delicately things are poised, although it has been on an impressive run since mid October.

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“Despite the poor GDP numbers, the weaker yen and falling commodity prices, together with more aggressive monetary stimulus is expected to benefit Japanese companies which have recently posted strong profits growth,” said  Paul Niven, head of multi-asset at F&C Investments.

“Any uncertainty which does creep in prior to the elections is unlikely to last long – timescales are short and markets are likely to take renewed confidence from a reconfirmation of Abe’s leadership – the most probable outcome,” Niven added.

Given all this, Niven said F&C remains positive on Japanese equities and is maintaining an overweight, but he is ‘mindful of potential further weakness in the yen.’

Should Abe secure a convincing victory as seems to be likely, it could be a good rallying point for Japan to build from and enact even bolder policies than have so far been implemented.

Such a scenario could represent an attractive entry point for investors to introduce, or raise allocations to the land of the rising sun.

Any result that does not grant the current regime with a clear mandate however would mean all bets on the country’s economic prospects are off.

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