Pedestrians are reflected
in an electronic stock board outside a securities firm in Tokyo, on
Wednesday, Nov. 19, 2014. Japan's Topix index rose after Prime Minister
Shinzo Abe postponed a planned sales tax increase, called a snap
election and ordered his ministers to start preparing a stimulus
package.
Japan’s
snap election on Dec. 14 is expected to net seats in the government for
Prime Minister Shinzo Abe’s Liberal Democratic Party (LDP) and
reinforce his popular mandate to pursue economic reforms. Should Abe
prevail—a strong likelihood considering his LDP enjoys a nearly 30-point
lead over the opposing Democratic Party of Japan in early polls—the
effect could be a boon to investors in the Japanese stock market, as it
would be an affirmation of Abe’s efforts to use unconventional measures
to boost the economy and end two decades of economic stagnation.
In essence, the election is a referendum on whether to support
Abe’s effort to delay an increase in the national sales tax, which the Ministry of Finance is pushing to offset large and rising government deficits. The net result of an Abe win could be an advance by Japanese equities that have already been performing well (to some extent pricing in an expected victory) despite a GDP that has contracted in two consecutive quarters. Should he fail, however, it would be a victory for Japan’s fiscal conservatives, led by the powerful bureaucrats from the MOF. In that case, an erosion in the LDP’s position could be seen as bearish, a sign of the market’s loss of faith in Abenomics.
“There are divided opinions about the economic policies that we are pursuing,” said Abe when announcing the election, which was a direct response to the news that Japan had officially slipped into recession. “To continue advancing that growth strategy with the support of the people, we need to listen to the voice of the people.”
Looking to recent history for answers
It was Abe’s mentor, Junichiro Koizumi, who last made the decision to dissolve parliament. In August 2005, stung by the defeat of his pet project to privatize the ¥330 trillion in savings and insurance accounts of Japan Post, the nation’s enormous postal service, the prime minister dissolved the legislature’s lower chamber and put its 480 seats up for grabs.
Where Is There Value Left in Developed Markets?
Despite fears that the move would plunge Japan into political uncertainty, Koizumi’s LDP won by a landslide, and investors in the Nikkei 225 Index soon reaped the benefits of the PM’s bold political move. Koizumi’s referendum kicked off a bona fide bull market, with the Nikkei 225 rising 40.2 percent in 2005 and nearing a 50 percent return only nine months after the snap election.
With Abe entering his own referendum on firmer footing, both personally (50 percent approval rating vs. Koizumi’s 47 percent) and for the LDP as a whole (294 seats vs. Koizumi’s 249 before the election), an absolute two-thirds majority sits well within the current prime minister’s reach. Such a resounding reelection would be a mandate for further structural reform and sizable fiscal stimulus. While past is certainly not prologue, that could be a strong argument for continued optimism in the markets.
Potential for a post-election bounce
Even the reaction to Abe’s election announcement had a positive effect, with the Nikkei 225 instantly adding 1.4 percent upon the news—a move that mirrored the 1.6 percent the index gained after Koizumi’s announcement in 2005. This marked the immediate reversal of a sell-off that began when Finance Minister Taro Aso, in uncharacteristically candid fashion, bemoaned the nation’s exchange rate and said the yen was falling “too fast.”
Ride the Tailwind of the Japanese Stimulus
“Investors entered an election mood,” observed Yoshohiro Ito, Chief Strategist at Okasan Online Securites, of the improved market outlook, and he turned to historical precedent as a primary reason why. “There are expectations for the market to gain during elections based on prior experiences.”
Currently, the Nikkei 225 is up 19 percent from its Oct. 17 low. While that rise is generally credited to the Bank of Japan’s aggressive quantitative easing policy and Abe’s 18-month postponement of a consumption tax increase, the equities market is no doubt bolstered by the recent earnings strength of Japanese corporations, which have successfully grown despite a contracting GDP.
Investors have begun to notice, flocking to opportunities that provide broad exposure to a basket of the country’s benchmark companies. One way to access exposure to large and midsize companies in Japan is through the iShares MSCI Japan ETF (EWJ) or the iShares Currency Hedged MSCI Japan ETF (HEWJ).
Yen Depreciation? No Problem
Next Market Up: Looking Overseas to Find Value
*Source of information in this story is Bloomberg, as of 11/2014 unless otherwise noted.
IMPORTANT INFORMATION:
Carefully consider the iShares Funds’ investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Funds’ prospectuses and, if available, summary prospectuses, which may be obtained by calling 1-800-iShares (1-800-474-2737) or by visiting www.iShares.com. Read the prospectus carefully before investing. Investing involves risk, including possible loss of principal.
In addition to the normal risks associated with investing, international investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Securities focusing on a single country may be subject to higher volatility. Exchange rates may be volatile and may change quickly and unpredictably in response to both global economic developments and economic conditions in a geographic region in which the Funds or the Underlying Funds invest. Past performance does not guarantee future results.
This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any security in particular.
The iShares Funds are distributed by BlackRock Investments, LLC (together with its affiliates, “BlackRock”). The iShares Funds are not sponsored, endorsed, issued, sold or promoted by MSCI, and MSCI does not make any representation regarding the advisability of investing in the Funds. BlackRock licenses the use of MSCI indices and is not affiliated with MSCI. iSHARES and BLACKROCK are registered trademarks of BlackRock. iS-14083-1114
In essence, the election is a referendum on whether to support
Abe’s effort to delay an increase in the national sales tax, which the Ministry of Finance is pushing to offset large and rising government deficits. The net result of an Abe win could be an advance by Japanese equities that have already been performing well (to some extent pricing in an expected victory) despite a GDP that has contracted in two consecutive quarters. Should he fail, however, it would be a victory for Japan’s fiscal conservatives, led by the powerful bureaucrats from the MOF. In that case, an erosion in the LDP’s position could be seen as bearish, a sign of the market’s loss of faith in Abenomics.
“There are divided opinions about the economic policies that we are pursuing,” said Abe when announcing the election, which was a direct response to the news that Japan had officially slipped into recession. “To continue advancing that growth strategy with the support of the people, we need to listen to the voice of the people.”
Looking to recent history for answers
It was Abe’s mentor, Junichiro Koizumi, who last made the decision to dissolve parliament. In August 2005, stung by the defeat of his pet project to privatize the ¥330 trillion in savings and insurance accounts of Japan Post, the nation’s enormous postal service, the prime minister dissolved the legislature’s lower chamber and put its 480 seats up for grabs.
Where Is There Value Left in Developed Markets?
Despite fears that the move would plunge Japan into political uncertainty, Koizumi’s LDP won by a landslide, and investors in the Nikkei 225 Index soon reaped the benefits of the PM’s bold political move. Koizumi’s referendum kicked off a bona fide bull market, with the Nikkei 225 rising 40.2 percent in 2005 and nearing a 50 percent return only nine months after the snap election.
With Abe entering his own referendum on firmer footing, both personally (50 percent approval rating vs. Koizumi’s 47 percent) and for the LDP as a whole (294 seats vs. Koizumi’s 249 before the election), an absolute two-thirds majority sits well within the current prime minister’s reach. Such a resounding reelection would be a mandate for further structural reform and sizable fiscal stimulus. While past is certainly not prologue, that could be a strong argument for continued optimism in the markets.
Potential for a post-election bounce
Even the reaction to Abe’s election announcement had a positive effect, with the Nikkei 225 instantly adding 1.4 percent upon the news—a move that mirrored the 1.6 percent the index gained after Koizumi’s announcement in 2005. This marked the immediate reversal of a sell-off that began when Finance Minister Taro Aso, in uncharacteristically candid fashion, bemoaned the nation’s exchange rate and said the yen was falling “too fast.”
Ride the Tailwind of the Japanese Stimulus
“Investors entered an election mood,” observed Yoshohiro Ito, Chief Strategist at Okasan Online Securites, of the improved market outlook, and he turned to historical precedent as a primary reason why. “There are expectations for the market to gain during elections based on prior experiences.”
Currently, the Nikkei 225 is up 19 percent from its Oct. 17 low. While that rise is generally credited to the Bank of Japan’s aggressive quantitative easing policy and Abe’s 18-month postponement of a consumption tax increase, the equities market is no doubt bolstered by the recent earnings strength of Japanese corporations, which have successfully grown despite a contracting GDP.
Investors have begun to notice, flocking to opportunities that provide broad exposure to a basket of the country’s benchmark companies. One way to access exposure to large and midsize companies in Japan is through the iShares MSCI Japan ETF (EWJ) or the iShares Currency Hedged MSCI Japan ETF (HEWJ).
Yen Depreciation? No Problem
Next Market Up: Looking Overseas to Find Value
*Source of information in this story is Bloomberg, as of 11/2014 unless otherwise noted.
IMPORTANT INFORMATION:
Carefully consider the iShares Funds’ investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Funds’ prospectuses and, if available, summary prospectuses, which may be obtained by calling 1-800-iShares (1-800-474-2737) or by visiting www.iShares.com. Read the prospectus carefully before investing. Investing involves risk, including possible loss of principal.
In addition to the normal risks associated with investing, international investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Securities focusing on a single country may be subject to higher volatility. Exchange rates may be volatile and may change quickly and unpredictably in response to both global economic developments and economic conditions in a geographic region in which the Funds or the Underlying Funds invest. Past performance does not guarantee future results.
This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any security in particular.
The iShares Funds are distributed by BlackRock Investments, LLC (together with its affiliates, “BlackRock”). The iShares Funds are not sponsored, endorsed, issued, sold or promoted by MSCI, and MSCI does not make any representation regarding the advisability of investing in the Funds. BlackRock licenses the use of MSCI indices and is not affiliated with MSCI. iSHARES and BLACKROCK are registered trademarks of BlackRock. iS-14083-1114
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