Shinzo Abe’s resignation could be an entry point for Japanese stocks, analysts say

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The resignation of Japanese Prime Minister Shinzo Abe, Japan’s oldest

prime minister, it could create an entry point for Japanese stocks, analysts said.

Daiju Aoki, Japan Regional CIO for

UBS values,

believes Japanese equities could experience volatility, but wrote that it remains “constructive” about equities as

Bank of Japan

keep buying exchange-traded funds.

In an interview, Bill Witherell, chief global economist at Cumberland Advisors, reiterated his bullish view on Japanese stocks despite Japan’s recent report of its worst quarter on record. Japan represents about 15% of the company’s international portfolios, held through

iShares MSCI Japan ETF

(ticker: EWJ) and up

iShares MSCI ACWI ex US

(ACWX). “We stand by our position” on the theory that Abe’s successor will come from the leadership of the ruling Liberal Democratic Party, Witherell said.

Abe became prime minister a year after China surpassed Japan as the world’s second-largest economy and 23 years after Japan’s stock market peaked. He lent his name to ‘Abenomics’, a three-pronged plan to combat deflation and revive Japanese economic growth, including aggressive easing of the Bank of Japan, public spending and structural reforms. During that time, the Bank of Japan set an inflation target of 2%. But Japan has never managed to get there and many of Abe’s projects were left unfinished.

Japan’s second-quarter GDP fell nearly 28% on an annualized basis, reflecting the pandemic lockdown and related disruptions and declining global demand. Even before the pandemic, Japan was hit hard by the US-China trade war and a sales tax increase.

The main candidates for the post of prime minister include Abe’s allied chief cabinet secretary Suga Yoshihide or Deputy Prime Minister and Finance Minister Aso Taro, according to EurasiaGroup Asia director Scott Seaman.

The yen, which has fallen 20% against the dollar since Abe became prime minister, advanced on news of his resignation. The yen could continue to rise as political risks rise in Japan and the US.

Bank of America

the analysts wrote.

However, the Bank of Japan, which has been aggressively lax monetary policy for years as part of its effort to pursue 2% inflation, will continue to support. Among other things, the Bank of Japan has also bought shares. The term of the Governor of the Bank of Japan, Kuroda Haruhiko, will end in April 2023.

Witherell predicts that Japanese GDP will contract by 6% in 2020. In 2021, the OECD projects growth of 2.1%. And UBS’s Aoki expects corporate profits to rise 41% in the fiscal year ending March 2022, with a rebound driven by manufacturing and private consumption. Japanese automakers are benefiting from a shift to more energy-efficient vehicles and stricter emissions standards, while REITs are attractive given Japan’s low interest rates.

‘Abenomics’ also made stocks more attractive, says Witherell. While Abe had a mixed track record in deregulating Japan, his attempts to reform corporate governance mean that 93.4% of publicly traded companies have more than one independent director in 2019, up from 21.5% in 2014. Meanwhile, cross-holdings are now below 10% of the total. market capitalization, up from 30% in the 1990s. “This development should reduce the protection of underperforming management and free locked capital that could be implemented more efficiently elsewhere,” says Witherell.

This year, iShares MSCI Japan ETF is up 7.4% on a price basis, while iShares MSCI ACWI ex US is up 6.2%. Since Abe took office in late 2012, the Japan ETF is up 67%, while the ACWI ex-US ETF is up 39%.

Write to Leslie P. Norton at [email protected]