Buy-Abenomics Bulls Aim for Election Victory Boost: Japan Credit

Japanese Prime Minister Shinzo Abe’s election win will encourage investors in Japanese bonds and stocks who benefited from the first two years of his policies.

Government notes returned 2.9 percent on annualized basis since Abe took office in December 2012, the most since Taro Aso’s tenure during the global financial crisis and twice the 1.4 percent gain for U.S. Treasuries, data from Bank of America Merrill Lynch show. The Topix stock index gained 32 percent a year, the most for any premier in at least two decades.

Abe’s ruling coalition gained more than a two-thirds majority, winning a mandate for his decision to postpone a sales-tax increase after the economy slid into a recession. Public support will allow Abe to be more aggressive in implementing monetary easing, fiscal stimulus and structural changes to the economy, after he urged Wall Street traders last year to “buy my Abenomics.”

“This year has been a very good year for markets,” though the government needs to ensure booming corporate profits from Abenomics are translated into the wider economy in the coming year, said Satoshi Okumoto, the chief executive officer and president at Fukoku Capital Management, which oversees the equivalent of $16 billion. “Abenomics will fail if real wages remain stagnant and policy effects are not felt.”

After the initial report last month showed that Japan’s economy had contracted for two consecutive quarters, Abe announced he was delaying a sales-tax increase set for October 2015 by 18 months and ordered plans for economic stimulus. The delay was cited by Moody’s Investors Service as a factor when it cut Japan’s debt rating on Dec. 1 by one level to A1.

‘Unlimited’ Stimulus

The coalition of Abe’s Liberal Democratic Party and junior partner Komeito won about 325 seats in the 475-seat chamber, the same as before yesterday’s election. While the victory was overshadowed by the lowest turnout since World War II, Abe need not call another election until 2018, potentially making him the longest-serving premier in four decades.

When he came to power in 2012 Abe called for “unlimited” monetary stimulus by the BOJ to end deflation. The central bank, which is targeting 2 percent inflation, expanded already unprecedented bond purchases on Oct. 31 by targeting an 80 trillion yen ($675 billion) a year increase in sovereign note holdings. The buying comes as public debt has soared to more than double the economy’s annual output, the largest burden in the world.

The central bank’s core measure of inflation was 2.9 percent in October, or 0.9 percent after stripping out the impact of a previous sales-tax increase in April. Paychecks haven’t kept pace, with wages adjusted for living costs dropping 2.8 percent from a year earlier in October, the 16th straight month of declines, government data showed this month.

Prioritize Growth

“The government must prove to voters the economy is in recovery and exiting from deflation before the upper house election in 2016 and they will start fiscal consolidation after that,” said Masayuki Kichikawa, the chief economist at Bank of America Corp., said in a Tokyo seminar on Dec. 10. “Economic policy will prioritize growth for the foreseeable future.”

Abe’s first stint as prime minister after Junichiro Koizumi stepped down in September 2006 lasted only a year. Five leaders followed, until Abe’s party regained power in December 2012.

“There was no surprise in the election result so the stability in government will further strengthen Abenomics, the reflationary policies,” said Tetsuro Ii, chief executive at Commons Asset Management. “Yields will stay stable at low levels.”

Low Yields

Japan’s 10-year government note touched 0.375 percent today, the lowest globally after Switzerland and the least since April 2013, when the BOJ introduced record stimulus.

The yen traded at 118.58 per dollar as of 3:12 p.m. in Tokyo after touching a seven-year low of 121.85 on Dec. 8. The Topix index fell 1.5 percent to 1,379.29.

“The election reflects voters’ confidence in Abenomics,” said Akio Kato, the Tokyo-based general manager of the trading department at Kokusai Asset Management, which manages $31 billion. “The current market rally will probably accelerate. The BOJ will continue its large-sale easing, bond yields will remain stable at low levels or fall further while yen weakness and stock advances will gain momentum.”

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