Daily Management Review

Abe wins; the yen is falling, stocks are rising


10/23/2017


The yen weakened, and Japanese stocks rose amid a stunning victory in the lower house of parliament of Prime Minister Shinzo Abe.



CJCS
CJCS
Early elections were won by the ruling coalition - the union of the Liberal Democratic Party and the center-right party Komeito. Abe’s coalition won 281 of the 465 seats in the parliament, and its traditional partner, Komeito Party, received 29 more seats.

Such results are sufficient not only for the adoption of any bill in general, but also for amending the constitution, although the latter still has get approval from the upper house and hold a referendum. But now Abe has received the opportunity to pursue a desired policy. Through repeated voting, he can pass even a law that was rejected in the upper house.

Against this background, the yen fell below 114 to the dollar, while the Nikkei 225 peaked to December 1996. It is also the longest period of growth for the Japanese stock market (15 consecutive days).

This is good news for most industries in Japan, although Abe's victory creates problems for retailers. It is obvious that now the Prime Minister will try to strengthen the ultra-soft monetary policy. For two decades, the policy has been contributing to the growth of Japanese stocks to the highest level and has been leveraging the second-largest economy of Asia six quarters in a row. At the same time, Abe cannot cope with stagnation in salaries and problems in the labor market.

As for the stock market, analysts believe that they still have a great potential for growth. The data of the trade commission for commodity futures show that the share of speculators is only 13% in the form of a share of total open positions. The overheated market is usually indicated by indicators above 25%.

 Meanwhile, foreign institutional investors are tiptoeing back, and stocks are cheap. Topix is traded with a coefficient of 15.4x to the profit of 2017, which is a 20% discount to the S&P 500 index. The contrast is even more clear at the book value: the Japanese stock market is traded at 1.4x, the S&P 500 is 3.2x.

It should be noted that Abe's position is not as strong as it may seem, especially in comparison with the last objective elections in late 2014. The Bank of Japan practically refused any influence on the yen after linking the yield of 10-year government bonds to zero in January 2016. Since then, the currency has been more closely related to US interest rates or Donald Trump’s mood swings.

In addition, the huge discount on the market used by investors in Japan is a sign that the cornerstone of the third direction of Abe's policy - improving corporate governance - does not work.

The book value per share of companies from Topix has been growing since 2014, while the US companies are steadily reducing their balances through share buybacks.

One could accuse the Bank of Japan of holding the stock markets back. Financial companies, which account for 12.5% of Topix, always find it difficult to earn money when the central bank keeps interest rates artificially low.

But the market drop will also hit three megabanks of Japan - Mitsubishi UFJ Financial Group Inc., Mizuho Financial Group Inc. and Sumitomo Mitsui Financial Group Inc. They could earn almost 7 trillion yen ($ 61.5 billion) if they just sold all their shares at the end of June. The fall of the market will mean a huge blow to Abe and his programs, so the stimulus will continue.

source: reuters.com






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