We continue to monitor the progress of Japan under Prime Minister Shinzo Abe. In essence, his “Abenomics” reforms aim to stimulate growth through three primary areas, referred to as the “three arrows.”
1. Large increases in the money supply. There have been significant increases in the money supply. To get a sense of the scale of Japan’s quantitative easing (QE) initiatives, the total U.S. economy has a gross domestic product of roughly $16 trillion and the Federal Reserve has been injecting $85 billion into the money supply on a monthly basis via QE. In contrast, Japan’s total GDP amounts to $6 trillion, but the Bank of Japan has been injecting a relatively much larger $70 billion a month into the domestic economy via QE.
2. Large increases in fiscal stimulus. The Japanese government plans to further increase deficit spending by 10 trillion yen (2% total increase) as part of Abe’s first major policy initiative to boost growth. (Source: Bloomberg, January 2013).
3. Structural reforms. Economic reforms (such as increasing the number of female workers, loosening of labor regulations, and raising the retirement age) are wide-ranging and likely to be the most difficult to achieve because of the politics and special interests involved in each decision.
To date, progress has been mixed in these areas, presenting cause for optimism as well as concern, over the ultimate success or failure of Abenomics. Yet changes have been significant enough that they are worth watching in the coming months and years.
Causes for optimism
- A weaker yen has stimulated exports. These higher export figures have partially helped increase GDP growth in the first half of 2013 (+1.2% in the first quarter and +7.1% in the second quarter). (Source: Bloomberg, October 2013)
- Earnings per share on the TOPIX (Tokyo Stock Price Index) is expected to grow by double-digits this year. (Source: Bloomberg Oct. 2013)
- The unemployment rate has fallen from 4.3% at the end of 2012 to 4.0% (as of the end of second quarter 2013). "Full employment" is roughly 3.6% and peak 2009 unemployment was 5.5%.
- The Consumer Price Index (-0.3% in the second quarter of 2013), which measures changes in purchasing trends, is expected to turn positive in the second half of the year and has already done so on a monthly basis. (Source: International Monetary Fund, October 2013)
- Consensus inflation expectations are for 0% in 2013 and 2% in 2014. (Source: Bloomberg, October 2013)
- Land prices have shown early signs of increasing.
- Abe’s approval rating is close to 70% (as of May 27, 2013). (Source: Japan Daily Press)
- Consumer confidence has improved to 44 (compared to 27 during 2008-2009).
- Japan’s purchasing managers index (an indicator of the economic health of the manufacturing sector) has rallied year to date from 45 to 51. (Source: Markit/JMMA Japan Manufacturing Purchasing Managers Index, October 2013)
- The Nikkei Index has rallied almost 70% (in local currency terms) over the year ended September 2013. (Source: Bloomberg)
The Tokyo Stock Price Index measures stock prices on the Tokyo Stock Exchange. It is believed to be more representative of the Japanese stock markets than the Nikkei Index because it includes all the largest companies, currently 1600 first section first section companies.
The Nikkei Index is a price-weighted index comprised of Japan’s top 225 blue-chip companies on the Tokyo Stock Exchange.
Causes For Concern
- Japan is the most highly leveraged nation in the world, with a public debt-to-GDP at approximately 240%. Fiscal spending has increased by another 2% (10 trillion yen). This will likely raise the deficit-to-GDP ratio to 11.5% in 2013. (Source: International Monetary Fund, October 2013)
- If the current QE program succeeds in creating inflation, interest rates will eventually have to rise. Higher interest payments on Japan’s debt would be difficult to manage without an offset of strong economic growth.
- Japan’s aging (and shrinking) population creates a structural headwind
- A consumption tax hike to 8% in 2014 and 10% in 2015 (at 5% as of October 2013) is expected to be an additional significant headwind to growth.
There is still limited evidence to suggest that Japanese consumers have started to “loosen their purse strings” in a meaningful way.
As bottom-up (stock-by-stock) investors, we believe that a successful company will succeed on the strength of its management, the competitiveness of its productive asset base, the quality of its balance sheet, and the structure of its global market positioning. The location of the company’s domicile is less important to us than its real underlying risk exposures. That said, we remain alert to the opportunities that such changes in Japan could represent to strong companies with favorable valuations within our value universe. We continue to keep a close eye on these macroeconomic developments as we research individual companies domiciled in Japan.
As of the end of the third quarter of 2013, our Global Value Fund portfolio had a slightly overweight position in Japan and our International Value Equity Fund portfolio was slightly underweight in Japan. On a stock-by-stock basis, we have trimmed back Japanese names that approached our target prices. We are also seeking new stock purchases that have a target price that we consider to be at least 50% ahead of current price and offer what we view as 20% downside protection to attempt to provide a margin of safety.
Todd Bassion is vice president at Delaware Investments and co-manages the Delaware Global Value and Delaware International Value Equity mutual funds.