Skeptics question Abe election joy as Topix hits decade high


As Prime Minister Shinzo Abe’s (picture) ruling party heads for what polls suggest will be its best national election result in more than three decades, Japan’s stock market has surged to heights not seen since before the financial crisis. Some investors and analysts are asking whether the optimism is overdone.

Jonathan Allum, a strategist at SMBC Nikko Capital Markets Ltd. in London, says he’s puzzled by the bullish view that a resounding Abe victory will revamp the premier’s program to revive the economy. In his opinion, nothing substantial will have changed: Abe will have the same ability to pursue his policy agenda as he had before the vote.

Benchmark equity gauges have breached what Japanese analysts have dubbed the “Abe high” reached in the summer of 2015, with the Topix index closing Tuesday at its highest in more than a decade and the Nikkei 225 Stock Average hitting a level last reached in 1996. While Abe’s ruling coalition is projected win more than two-thirds of the vote in the Lower-House election on Oct. 22, it already had this super-majority.

“Will the current election make a difference?” Allum wrote in a note to clients last week. “It is difficult to argue that Abe has been constrained in pursuing the policies that appeal to him.”

Toru Ibayashi, the head of Japanese equities at UBS Wealth Management in Tokyo, puts it more bluntly. While acknowledging Abe’s success in bolstering the Japanese economy since the end of 2012, he says the economy may no longer be the first priority for the new administration, and Japan needs “new drivers or engines.” UBS’s $2.2 trillion wealth management unit has been neutral on the country’s stocks for more than a year.

‘Losing Steam’ 

“Abenomics is losing steam,” Ibayashi said in an interview. There’s “nothing new” in Abe’s agenda, so the situation after the vote will be “status quo at best,” he said.

Abe’s Liberal Democratic Party is projected to win as many as 303 seats, close to two-thirds of the 465 up for grabs, a Mainichi newspaper survey showed. That would put the party just shy of the record 304 it set in July 1986. The ruling coalition, including the LDP’s partner Komeito, would retain the super-majority needed to advance Abe’s plans to revise Japan’s pacifist constitution. As recently as early October, polls showed Abe’s approval rating dipped below his disapproval rating.

Foreigners, who had deserted Japanese stocks, have returned to the market in droves. Overseas investors bought a net 657.5 billion yen ($5.9 billion) of the nation’s shares in the first week of October, the most in 2 1/2 years, the latest data from Japan Exchange Group Inc. show.

Fading Challenge

The challenge from a populist party formed by Tokyo Governor Yuriko Koike has ebbed. Koike’s Party of Hope has two big policy differences from Abe’s coalition: the new party wants to freeze plans to raise the consumption tax in October 2019, and eliminate nuclear power from Japan’s energy mix by 2030. (Both groups want to revise the constitution.) Abe has billed the snap election as a chance to test public opinion on the sales-levy increase. When he raised the tax in 2014, the economy declined for two quarters.

“I’m not sure having Abe is bound to be a good thing,” said Hiroshi Matsumoto, head of Japan investment at Pictet Asset Management Ltd., who says increasing the sales tax will be negative for stocks while continued easy monetary policy will be positive. “But his policies are more realistic than those of the opposition.”

To be sure, bears on the election are still in the minority. Strategists and investors surveyed by Bloomberg as of Oct. 5 increased their year-end target for the Nikkei 225 compared with the previous poll at the end of August. In fact, the Nikkei has already exceeded their average target of 20,859, closing Wednesday at 21,363.05. Andrew Clarke, director of trading at Mirabaud Asia Ltd. Hong Kong, says the gauge is set to hit 25,000 within the next six months.

The Topix and the Nikkei 225 each rose 0.1 percent in Tokyo on Wednesday.

“A robust coalition electoral victory would further reinvigorate an already solid recovery in the Japanese economy,” said Nader Naeimi, who helps manage about $110 billion at AMP Capital Investors Ltd. “A solid win by Abe and the activity ahead of the 2020 Olympics presents Japan as a great investment destination.”

Earnings Season

For Shoichi Arisawa of Iwai Cosmo Securities Co., the rally that sent the Topix up 14 percent this year has plenty of room to run. Earnings season kicks off in earnest just after the vote, and he expects companies to post strong profits.

“They picked an extremely good time for the election,” the Osaka-based analyst said. “There won’t be a shortage of positive factors for stocks.”

But for Ibayashi, neither of the two — the election or earnings — hold much appeal. He’s predicting minimal profit growth next year. Topix companies’ earnings per share is expected to decline in the fourth quarter of 2017 compared with the previous year, after posting four straight periods of strong double-digit growth.

“We need something new,” Ibayashi said.