AMP Capital Investors Ltd., a unit of Australia’s biggest asset manager, resumed buying Japanese shares on expectations that Prime Minister Shinzo Abe will win upper-house elections, enabling him to push through reforms, and the yen will weaken.
Stocks will rally as much as 20 percent and the yen will fall to 110 to the dollar by the end of the year, said Nader Naeimi, Sydney-based head of dynamic asset allocation at AMP Capital, which manages more than $130 billion. Naeimi, who correctly predicted the magnitude of the recent correction in Japanese stocks, started buying again near the end of June. Retail, real estate and financial companies, as well as exporters, will benefit the most, he said.
“After upper-house elections on July 21, the Japanese share market will get new vigor,” Naeimi said by phone from Sydney on July 1, after a three-day trip last month to meet Japanese company and government officials. “Abe will have power in both chambers, which means he’ll have total control for three years. He’ll use this time to change Japan’s economy as much as he can. It’s way too early to be pessimistic.”
The Topix index fell as much as 18 percent from an almost five-year high on May 22, closing 8.3 percent lower than the peak today. Even after the drop, Japan has outperformed all major equity markets this year on optimism Abe’s “three arrows” -- fiscal stimulus, monetary easing and structural reforms -- will beat deflation, weaken the yen and boost growth.
Naeimi sees the currency falling further this year as real yields in the U.S. rise, making Japanese government bonds less attractive and limiting capital inflows to the country. The likelihood of the Federal Reserve drawing down monetary easing while the Bank of Japan continues with record stimulus will also weaken the yen, he said.
Yields of just under 0.9 percent on Japan’s 10-year notes rise to 1.17 percent after accounting for deflation. The so-called real yields were as high as 1.63 percent in May, the most since April 2011. Real yields for 10-year Treasuries are 1.14 percent and were negative as recently as March.
The Topix lost 0.3 percent today at the close in Tokyo, with the yen gaining 0.3 percent to 99.64 against the greenback.
The equity gauge tumbled 3.2 percent on June 5 after Abe said his growth plan wouldn’t begin for months, signaling he is putting off broad economic reforms until he secures control of the upper house of parliament. He vowed the same day to deregulate the energy, health and infrastructure industries, as well as doubling foreign investment by 2020 and boosting power-industry investment to 30 trillion yen ($300 billion) within a decade.
“When we met with authorities in Japan in June, we heard shorter-term targets,” Naeimi said. “A 10- to 20-year horizon doesn’t give anyone conviction.”
Initiatives to boost spending are a top priority, Naeimi said. Corporations’ stockpile of cash reached a record 225 trillion yen in the first quarter, bigger than Italy’s economy, Bank of Japan figures show. The government is weighing tax reforms to promote capital investment, including allowing all-at-once tax write-offs for such spending, Economy Minister Akira Amari said on July 1.
“These policies aren’t groundbreaking, they’re not headline-grabbing, but they’re very important,” Naeimi said. “What Japan really needs is to get people spending. Households and corporates have totally clean balance sheets but they haven’t been encouraged to spend.”
Official campaigning for this month’s upper-house polls began today. Abe’s ruling Liberal Democratic Party and its coalition partner won nearly two-thirds of the seats in a Tokyo assembly election last month, boding well for national polls. Abe wants to focus on the economy for the next three years, he said on June 26.
Confidence is filtering down to companies, with a gauge of sentiment among large manufacturers turning positive for the first time since 2011. The quarterly Tankan index rose to plus four in June from minus eight in March, the Bank of Japan said on July 1. Large companies from all industries plan to increase capital spending 5.5 percent this fiscal year as the government promotes investment, central bank figures show.
Consumer confidence has also improved, rising in May to the highest since 2007, a Cabinet Office survey showed. Housing starts that month capped a nine-month advance, the longest streak of gains since February 2011.
“After the election, we’ll see a sweep of new policy announcements,” Naeimi said. “We’ve used this weakness to buy more shares. We viewed it as a correction, not a downward trend. But if we don’t see those announcements, it’ll be a trigger for us to reduce.”
Government efforts to get more women into the workforce may also boost spending, Naeimi said. Abe promises to capitalize on what he calls the “underutilized resource” in an economy where one in four people is already over 65 years old. He has vowed to eliminate waiting lists for childcare and provide training for mothers seeking to return to work.
Women make up just 15 percent of department managers, according to the Ministry of Health, Labor & Welfare, with female workers earning only about 70 percent of what their male counterparts make. Long office hours and a shortage of facilities for child and elderly care often keep women from pursuing senior positions, sometimes keeping them out of the workforce altogether.
“Underneath it all, there are some really interesting policies taking place,” Naeimi said. “Invest in sectors that will benefit most from an domestic economic recovery as well as companies that will reap profits from increased domestic spending. Corrections have been big in these sectors, so they’re a great opportunity again.”