Miyuki Kashima | Head of the Japanese Equity Investment Division, BNY Mellon Asset Management Japan Limited
PREPARED FOR PROFESSIONAL CLIENTS ONLY
With the consumption tax hike and the election now behind us, benefits of Abenomics will be more visible in 2015. The strong December 14, 2014 lower house election results for the Liberal Democratic Party (LDP) mean that the Japanese public has endorsed the government to continue with Abenomics. The LDP now commands a comfortable majority having kept most of the seats gained during the landslide victory at the end of 2012. By most measures, the Japanese economy is in much better shape compared to two years ago, but the long term recovery story has only just begun. The economic data volatility and confusion due to the consumption tax increase in 2014 will be absent in 2015. Investors will be able to clearly see the benefits resulting from current policies.
Two years ago, the Japanese public was skeptical about Abenomics. The series of monetary, fiscal and growth policies were bold, but many doubted the government’s ability to pull the third largest economy in the world1 out of 20 years of stagnation. The results so far have been impressive; Deflation, one of the main causes for the prolonged slowdown, has been reversed. CPI has been in positive territory since June 20132. Unemployment has fallen from 4.5% in December 2012 to 3.5% in October 20143. Tokyo center office vacancies have declined steadily to 5.5% in November 2014 from 8.67% in December 20124. The average 2014 summer bonus increased 8.48% YOY, the highest level in over 20 years5. Despite the second quarter pullback in GDP following the consumption tax hike in April from 5% to 8%, (which was decided by the previous government), third quarter nominal GDP was 2.5% higher than what it was in the fourth quarter of 20126 when the current government first came to power.
The most attractive aspect of the Japanese market is the prospect of a sustained, longer term recovery. Japan’s nominal GDP (a more appropriate measure for a country suffering from deflation than real GDP), peaked in 1997 and declined about 10% by the end of 20127. In this environment, companies curtailed capital expenditure and spending of all kinds including investing in people. This is evident from the fact that 44.9% of manufacturing facilities were over 15 years old at the mid-year point of 2013, compared to 33.1% in 19948. It is also reflected in the increase in the proportion of part-time workers from about 18% in 1995 to about 35% in 20139. As a result, the loan to deposit ratio of the banking industry has fallen from over 100% in 1995 to only 60% in 2013 reflecting a vicious cycle of deflation and negative business sentiment10. Once deflation ends, we believe the investment opportunities for the Japanese market are attractive on an extended time horizon, and we believe that Prime Minister Abe is on track to accomplish this.
Last but not least, despite complaints that the positive effects of Abenomics are not being felt by everyone just yet, the election results confirm that the public endorses the government’s current policies and have accepted some of the pain associated with changes that include an increase in consumption tax, inheritance tax, and medical costs for the elderly. The public seems willing to swallow a bitter pill for the sake of its future. This public support combined with a stable government for the first time in many years is an encouraging sign.
Very unlikely. Despite the significant positive turnaround in the political and economic backdrop with company earnings and the stock market both rising, global investors are still underweight in Japanese equities and we expect this to change over time as fundamentals continue to improve.
We believe the Japanese equity market presents a compelling opportunity as the recovery in the stock market has significantly lagged earnings as shown in Chart 2 below. The earthquake, the strong yen and the ever-rotating prime ministers held back Japan’s recovery. Even after the sharp stock market rise in 2013 and a further modest rise in 201411 the Japanese equity market, unlike the rest of the world, has not caught up with the earnings recovery, underway since 2008. And it has yet to factor in the potential for change.
For the 2015 fiscal year which starts in April, we believe the corporate earnings outlook is particularly positive. There are several reasons for this. In addition to the longer term benefits of Abenomics which are starting to come through, the weaker yen, and oil price will be a plus for EPS growth, as well as the expected 2.5% decline in the corporate tax rate and the postponement of the additional 2% rise in the consumption tax from Oct 2015 to April 2017. The consensus EPS growth for next year is about 10%, but we are starting to see estimates being revised upwards into the teens and even above 20%12.
1 World Bank, updated September 24 2014
4 Miki Shoji, Miki Office Report Tokyo
5 Nikkei Newspaper July 14 2014
6 Cabinet Office, Government of Japan
7 Cabinet Office, Government of Japan
8 Ministry of Economy Trade and Industry, Report May 31 2013
9 Statistics Japan, Statistics Bureau, Ministry of Internal Affairs and Communications, December 2013
10 Bank of Japan, September 2014
11 Bloomberg, January to November 2014
12 Nomura Securities Survey, 2015
BNY Mellon Investment Management is one of the world’s leading investment management organizations and one of the top U.S. wealth managers, encompassing BNY Mellon’s affiliated investment management firms, wealth management organization and global distribution companies. BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation and may also be used as a generic term to reference the Corporation as a whole or its various subsidiaries generally.
The information in this document is not intended to be investment advice, and it may be deemed a financial promotion in non-U.S. jurisdictions. Accordingly, where this document is used or distributed in any non-U.S. jurisdiction, the information provided is for Professional Clients only. This material is not for onward distribution to, or to be relied upon by, retail investors.
Any statements and opinions expressed in this document are as of the date of the article, are subject to change as economic and market conditions dictate, and do not necessarily represent the views of BNY Mellon or any of its affiliates. The information contained in this document has been provided as a general market commentary only and does not constitute legal, tax, accounting, other professional counsel or investment advice, is not predictive of future performance, and should not be construed as an offer to sell or a solicitation to buy any security or make an offer where otherwise unlawful. The information has been provided without taking into account the investment objective, financial situation or needs of any particular person. BNY Mellon and its affiliates are not responsible for any subsequent investment advice given based on the information supplied. This document is not investment research or a research recommendation for regulatory purposes as it does not constitute substantive research or analysis. To the extent that these materials contain statements about future performance, such statements are forward looking and are subject to a number of risks and uncertainties. Information and opinions presented in this material have been obtained or derived from sources which BNY Mellon believed to be reliable, but BNY Mellon makes no representation to its accuracy and completeness. BNY Mellon accepts no liability for loss arising from use of this material. If nothing is indicated to the contrary, all figures are unaudited.
Any indication of past performance is not a guide to future performance. The value of investments can fall as well as rise, so you may get back less than you originally invested.
This document is not intended for distribution to, or use by, any person or entity in any jurisdiction or country in which such distribution or use would be contrary to local law or regulation. This document may not be distributed or used for the purpose of offers or solicitations in any jurisdiction or in any circumstances in which such offers or solicitations are unlawful or not authorized, or where there would be, by virtue of such distribution, new or additional registration requirements. Persons into whose possession this document comes are required to inform themselves about and to observe any restrictions that apply to the distribution of this document in their jurisdiction. The investment products and services mentioned here are not insured by the FDIC (or any other state or federal agency), are not deposits of or guaranteed by any bank, and may lose value.
This document should not be published in hard copy, electronic form, via the web or in any other medium accessible to the public, unless authorized by BNY Mellon Investment Management.
This document is approved for Global distribution and is issued in the following jurisdictions by the named local entities or divisions: UK and in mainland Europe (excluding Germany): BNYMIM EMEA, BNY Mellon Centre, 160 Queen Victoria Street, London EC4V 4LA. Registered in England No. 1118580. Authorised and regulated by the Financial Conduct Authority. • Germany: Meriten Investment Management GmbH which is regulated by the Bundesanstalt für Finanzdienstleistungsaufsicht. • Dubai, United Arab Emirates: Dubai branch of The Bank of New York Mellon, which is regulated by the Dubai Financial Services Authority. This material is intended for Professional Clients only and no other person should act upon it.• Singapore: BNY Mellon Investment Management Singapore Pte. Limited Co. Reg. 201230427E. Regulated by the Monetary Authority of Singapore. • Hong Kong: BNY Mellon Investment Management Hong Kong Limited. Regulated by the Hong Kong Securities and Futures Commission. • Japan: BNY Mellon Asset Management Japan Limited. BNY Mellon Asset Management Japan Limited is a Financial Instruments Business Operator with license no 406 (Kinsho) at the Commissioner of Kanto Local Finance Bureau and is a Member of the Investment Trusts Association, Japan and Japan Securities Investment Advisers Association. • Australia: BNY Mellon Investment Management Australia Ltd (ABN 56 102 482 815, AFS License No. 227865). Authorized and regulated by the Australian Securities & Investments Commission. • United States: BNY Mellon Investment Management. • Canada: Securities are offered through BNY Mellon Asset Management Canada Ltd., registered as a Portfolio Manager and Exempt Market Dealer in all provinces and territories of Canada, and as an Investment Fund Manager and Commodity Trading Manager in Ontario. • Brazil: this document is issued by ARX Investimentos Ltda., Av. Borges de Medeiros, 633, 4th floor, Rio de Janeiro, RJ, Brazil, CEP 22430-041. Authorized and regulated by the Brazilian Securities and Exchange Commission (CVM).
The issuing entities above are BNY Mellon entities ultimately owned by The Bank of New York Mellon Corporation
BNY Mellon Company information
BNY Mellon Cash Investment Strategies is a division of The Dreyfus Corporation. • BNY Mellon Western FMC, Insight Investment Management Limited and Meriten Investment Management GmbH do not offer services in the U.S. This presentation does not constitute an offer to sell, or a solicitation of an offer to purchase, any of the firms’ services or funds to any U.S. investor, or where otherwise unlawful. • BNY Mellon Western Fund Management Company Limited is a joint venture between BNY Mellon (49%) and China based Western Securities Company Ltd. (51%). The firm does not offer services outside of the People’s Republic of China. • BNY Mellon owns 90% of The Boston Company Asset Management, LLC and the remainder is owned by employees of the firm.• BNY Mellon owns a 19.9% minority interest in The Hamon Investment Group Pte Limited, the parent company of Blackfriars Asset Management Limited and Hamon Asian Advisors Limited both of which offer investment services in the U.S.• The Newton Group (“Newton”) is comprised of the following affiliated companies: Newton Investment Management Limited, Newton Capital Management Limited (NCM Ltd), Newton Capital Management LLC (NCM LLC), Newton International Investment Management Limited and Newton Fund Managers (C.I.) Limited. NCM LLC personnel are supervised persons of NCM Ltd and NCM LLC does not provide investment advice, all of which is conducted by NCM Ltd. Only NCM LLC and NCM Ltd offer services in the U.S.• BNY Mellon owns a 20% interest in Siguler Guff & Company, LP and certain related entities (including Siguler Guff Advisers LLC).
©2015 The Bank of New York Mellon Corporation.