The positive impact of Abenomics on Japan’s economy and stock market

Yunyoung Lee, manager of the Henderson Horizon Japanese Smaller Companies Fund, discusses the positive impact of Abenomics on Japan’s economy and stock market- a key reason why he is bullish on Japanese smaller companies.

Key takeaways:
• Four years of Abenomics are having a positive impact on Japan’s economy and stock market
• Japanese smaller companies have stronger investment potential due to their domestic bias and less research coverage
• US/Japan relations under US President Donald Trump appear more promising than expected

It has been more than four years since Shinzo Abe was elected Prime Minster of Japan, ushering in the era of Abenomics, based upon the ‘three arrows’ of monetary easing, fiscal stimulus, and structural reforms aimed at injecting new life into the moribund Japanese economy. Throughout this period we have been monitoring the progress of these policies and can now conclude that they have produced positive results.

Abenomics’ positive scorecard
In our view, Abenomics is delivering quantifiable positive changes to the Japanese economy and its stock market. The first wave of monetary easing has seen the US dollar/yen exchange rate rise by almost 30%. Nominal GDP, meanwhile, has risen 9.5%; the unemployment rate has fallen from over 4% to under 3% and the return-on-equity of the Nikkei Index has increased from 5.5% to 8.1%. Investors in Japanese equities seem to have a favourable view of Abenomics too with the Nikkei 225 Index up 82%. (All figures relate to the period since Abenomics was introduced ie. December 2012 to March 2017).

Risk can turn into opportunity
A key concern for Japanese investors is the uncertainty around US President Trump’s new administration and how it will affect the US/Japan relationship. Yet the reality is that policy decisions taken in Washington DC could be highly beneficial for some selected Japanese companies. For instance, crane maker Tadano, which also operates in the US, could be a winner should President Trump follow through on his promise to unleash a wave of infrastructure spending. On this potential, we have added the company to our portfolio.

While President Trump’s protectionist stance is a worry for trade and manufacturing, we think Japan’s cyclical recovery will be able to counter the slow process of increasing protectionist measures. Moreover, the concerns and negative sentiment around Trump may have been overblown. At a meeting in February, Prime Minister Abe and President Trump issued a joint statement to reaffirm their “unshakeable alliance”; the two leaders appeared to have made some progress on major economic and security deals.

In the meantime, we continue to stick to our process of finding value opportunities and potential catalysts in the Japanese smaller companies space. Our substantial experience of investing in the asset class reconfirms our belief that a focus on fundamental analysis can identify stock opportunities that are capable of delivering improved earnings growth and share price appreciation.

Yunyoung Lee – manager of the Henderson Horizon Japanese Smaller Companies Fund – Henderson