Whatever happens, this is a new era for Japan
The Democratic Party of Japan (DPJ) aims to break up the consensual style of government that marked the LDP years, and to place more power in the hands of elected politicians rather than the bureaucrats. The balance of power has certainly changed, with many influential and veteran LDP politicians losing out to new and untested rivals, some of whom are women.
But is this new regime up to the task of reforming Japan and driving it forward in a sustainable fashion? Koji Umehara, Senior Fund Manager, Japanese Small & Mid Cap Equity Group at Sumitomo Mitsui Asset Management in Tokyo comments: “The DPJ has set a slogan stating “Putting People’s Lives First”. They have clearly prioritised policies to drive domestic demand. For example, the enforcement of ‘child benefit’ and the abolition of temporary tariffs on gasoline and other auto-related items could stimulate consumption through increasing disposable income.
“If we succeed in improving the dwindling Japanese birthrate, it could reverse the downward trend in population and further contribute to igniting the potential growth in domestic demands in the medium-term. If the abolition of the ‘spouse deduction’ from taxable income takes place, which has been debated together with the introduction of child benefit, and nursing services become more freely available, it could consequently stimulate domestic demand by increasing the ratio of women in the workforce.”
To extrapolate this optimistic scenario further, Umehara suggests domestic demand could be stimulated through radical pension and medical reform, and effective budgetary reallocation to reduce the average Japanese person’s anxiety about what will happen as they get older. “If a part of the massive private savings of 1,400 trillion yen could be shifted towards consumption based on an improved expectation for later years, it could have a substantial effect on the domestic-demand,” he says.
In reality, the DPJ plan needs to overcome the challenge of how they are going to finance this new welfare culture. But Umehara believes that at least the policy is pointing in the right direction towards revitalising Japan. “Once stimulated we see the increases in private consumption and domestic corporate activity, the Government should see increase in tax revenue in a virtuous circle.”
Yuichi Chiguchi, Senior Fund Manager of the High Alpha Strategy Group at DIAM in Tokyo, says, “The advantage of having an absolute stable majority in the House of Representatives gives the DPJ the chance to develop a broad sweep of legislation. With a new and different government, we should see a longer and more stable administration. Another important point must be the fact that many senior and influential LDP members failed to get re-elected. Some of them were important policy makers who were well supported by industry and the bureaucracy. Some Japanese, especially reform-oriented people, regarded them as the obstacles of reform. Their departure from the Diet provides some positive impetus for a new framework among lawmakers, business people and bureaucrats.”
Nonetheless, economists and business people in Japan have reason to be sceptical of the capability of the DPJ administration, because it is all so new. As for their key policies, the introduction of the Child Allowance, a higher minimum wage and free highways, focus mainly on low-mid income consumers and SMEs. All eyes are on just how the new administration plans to implement these policies.
From an investment perspective, no one should be lulled into thinking that this latest version of the new Japan story will be any more successful than previous versions. Nonetheless, as SMAM’s Umehara-san says, “Obviously, domestic demand oriented companies would be beneficiaries of the DPJ policies. There are many small companies that might represent sound investment opportunities. But ever since the Livedoor shock in January 2006, the price of Japanese small-cap stocks has been hit hard. They turned around earlier in 2009, but many of them are still below their breakup value. If the Japanese economy is really revitalised under the DPJ government, we think small-cap stocks, in particular, could benefit from improved corporate earnings and higher valuations.”
Healthcare and social security budgets were once reduced by JPY 220 billion per year during the reforms of the Koizumi administration. It is highly likely this policy will be reversed under the DPJ. The healthcare, medical and nursery care related initiatives will logically boost companies operating in this area. Chiguchi comments: “If the administration continues to focus on the enhancement of domestic demand, then we will see a significant shift in macro economic style. We might even overcome some of our major structural problems, such as the aging society, with child care measures and the support of low and middle income individuals. Looking at it long term, this new administration could provide us with the chance if making Japan an attractive investment target.”
It’s not all sweetness and light though. Some capital market players have expressed concern over how the DPJ policies will influence the functioning of the markets. Chiguchi says, “The fundamental principle of capitalism is we accept that for one person to win, another person has to lose. Market players are watching closely to see whether the grand design of the DPJ would contradict that basic principle. It may not show up clearly for some time yet, but we need to monitor the development very closely.”
However, from a big picture point of view, change itself must be a good thing for Japanese politics. Chiguchi concludes, “We have never had a real change of government since 1945, and it is fair to say that there are bound to be some unexpected positive developments from this new administration, as well as uncertainties. It certainly provides us with investment opportunity. I mean, we cannot make money if we all believe that everything is all right. From this perspective, investors, mainly non-Japanese investors, should regard the event as a catalyst to reallocate their asset towards Japan.”