I visited Japan in late September to meet with investors and policymakers and to kick the tires on Abenomics and the Bank of Japan's (BoJ) monetary policy. It proved to be a timely visit as it was just after Prime Minister Abe announced snap elections for Sunday 22 October and Tokyo governor Koike announced the launch of her rival party, “the party of hope”.
The conference I went to was, unlike five years ago, dominated by locals. My take on this is that there doesn’t seem to be much interest in Japanese investment ideas by foreigners, which makes me wonder whether we are collectively missing a trick. The foreigners who were at the conference were mainly interested in future Japanese investor behaviour. Given the size of the Japanese investor base, new trends in Japanese investor behaviour will change market pricing and hence it’s important to keep the pulse with these trends. Japanese participants at the conference were very sceptical about the ability of the economy and BoJ to ever create inflation: it highlights that once the deflationary mind-set sets in it's difficult to spring out of it (as low inflation expectation breed low inflation).
The trip made me realise again what a fascinating country Japan is. Whether you consider culture, technology, economics or social developments, Japan remains quite different from the western perception of what is mainstream. This makes it an interesting part of the investment universe as it could provide idiosyncratic or diversifying investment opportunities.
In the context of cultural differences I would like to share the fact that I had the opportunity to see Kabuki in Tokyo; a classical Japanese opera. I like western opera (‘la mamma morta’ by Maria Callas is in my top three best performances ever) and I was kind of intrigued to be able to see some of the Japanese equivalent. Like western opera, Kabuki is not everyone’s cup of tea. It requires quite some endurance from both players and the audience as the traditional performance lasts no less than five hours (I went to a shortened version of 30 minutes). The performance is not about the story; it is all about the purity and drama of the singing and dancing. Even my Japanese friends told me they find Kabuki difficult to understand, as the language is quite old and the style of speech is unique to the art. To be honest I thought the music was sort of unsettling. At the beginning I could not detect a melody or too much cohesion between the musicians and to the untrained listener, like me, it felt like a Monty Python-like random cacophony of sounds. This got better after you get used to the sounds. The dancers were extremely impressive though. The gracious dance moves and freezing perfected postures, which they train at for their entire life, are nothing I have ever seen before and made it a great cultural experience.
In my view, the short video gives a good impression about how different Kabuki is to anything I have seen before, although it doesn't capture the stunning perfection and serenity of the dancers in the rest of the play.
Factors that have made Japan different in recent decades include its struggle with deflation and the challenge of an ageing population. Some people might argue that this is not too different from the western world; Japan is just early in this trend. The BoJ is desperate to create inflation. So it creates nominal growth, in order that Japan can start to lower its debt to GDP levels. As expected, the BoJ people I met spoke with confidence about their monetary policy. They believe their yield curve targeting is working and that they can maintain this policy for another two to three years before it runs out of things to buy. The BoJ was more realistic now about the detrimental side effects of negative yields for banks – basically killing their profitability and therefore their willingness to provide credit – which they would have dismissed last year. The BoJ had no clear answer what to do in case of a global deflationary shock as it kind of admitted that it would have difficulties to increase the pace of bond buying for a prolonged period of time.
During the week I was in Japan, Koike’s new ‘party of hope’ was the talk of the day. Many of her policy positions remain unclear and actually quite similar to the ruling LDP policies. One of my contacts, who served in the Japanese government under the popular reformer Koizumi, was surprisingly critical about Abe’s remaining reform drive (Abenomics has lost momentum and big government and rent seeking is back in fashion). On the other hand he was raving about the reform focus of Koike. There was clear excitement amongst the people I have met on whether she could do “a Macron”. Since then the enthusiasm for the new kid on the block and the potential disruption of the political landscape in Japan has receded a bit. Koike seems to have difficulties to organise her party so quickly before the elections (Macron at least had a year or so) and the LDP’s popularity in the polls is stabilising at decent levels.
We believe the ruling coalition might end up surrendering its current two-thirds majority (at least 310 seats), but will have little difficulty maintaining a simple majority (at least 233 seats). This would mean business as usual for Japan and not much appetite for new revival of structural reforms, like my teammate Tim Drayson already concluded in his postcard from Japan.
What does this mean for our view on Japanese investments? Despite the expectation of the continuation of the status quo I got from my visit I believe the Japanese stock markets remain interesting as Japan is ignored by international investors. We believe that stock market is cheap and under-owned on a historical basis, and for instance its technology / robotics sector is top notch. The increased attention for corporate governance in Japan could boost return on equity going forward. We now have a positive bias to Japanese equities. The Japanese government bond market remains dominated by the BoJ. There are some tactical opportunities, for instance to go short when interest rates drift to the low end of the current BoJ-managed range of 0 basis points on the 10-year bonds, but it seems uninteresting as a longer-term investment.
Finally, we now expect Prime Minister Abe to be able to remain in his post until after the Tokyo Olympics. Personally, I can’t wait to see him in his Super Mario outfit again.