It’s all been relatively quiet on the eastern front of the world markets, and it seems like there is as of yet very little political campaigning going on before the December 14th election. What little information there is has to be gleamed from elsewhere, and Bloomberg seems comically split on the issue. Their main Japan / East Asia columnist is essentially condemning the islands to submersion in their own sea of debt, while their paid advertisement articles are extremely bullish on the country, and the news reporting at least falls somewhere in between.
The reporting is partially on the Japanese high court deciding that the last two elections (lower house of the Diet in 2012 and upper house in 2013) were held in unconstitutional conditions. The problem was that rural area votes in some cases had a higher weight by nearly five times those of urban areas, and that this was not consistent with the equal representation demands. Since rural areas are largely driven by farmers and elderly, this thus means that the farm lobbies’ and pensioners’ concerns carry disproportionate weight in the Japanese elections. I think rural communities need a revival in Japan, but that should be from creation of economic opportunity, rather than entrenchment of defunct systems of finance and influence transfer structures.
Separately, Bloomberg is also reporting on the prospect of Abe putting a second woman on the Bank of Japan board, which would for all intents and purposes be as great a positive as you could get. This is partially, as the article states, because more female-friendly work reforms is the top political issue for the most voters (21%!) and Abe showing leadership after some very problematic minister resignations earlier this year would be most welcome. Having positive alignments towards the current political ideas and Bank of Japan “Qualitative and Quantitative Easing” program will also be a great benefit on the candidates, so finding a woman that supports Kuroda would essentially killing two birds with one stone!
Read the articles, then read on for some of my more detailed takes on these developments!
Bank of Japan perspective:
The central bank dissent that Pesek mentions in his Bloomberg View piece isn’t inaccurate, but it is misleading. Sure, the minutes were out and showed dissent, but honestly speaking, the reason the decision was so effective was that it was unexpected. There had been a few good data points out, and that had generally led most of the analysts predicting more stimulus to abandon their previous forecasts. Unexpected decisions do not get taken when everyone agrees on what to do, and the thing is that after the GDP data came in Kuroda was largely proven right, and got the rest of the BOJ board with him, save one dissenter. He seems to have much less isolation now, and probably gained a bit of power by getting on the right side of the boat even in the face of a difficult decision. His current challenge, I would argue, would be to inspire Abe to enact more reform and not lean on the BOJ like a drunkard whenever he is expected to see policy stumbles.
Corporate reform, earnings and prospects:
The BlackRock iShares promotion connects the dots in the sweet spot that Japan is in now with a sinking currency and commodity prices that are decreasing and might be set to go even lower. Currently, BlackRock describes Japan as one of the cheaper markets in the world, given low numbers of P/E, P/B, and valuation increases on the year that appear low by global standards. Again, it is difficult to argue against this, but the P/B number have one problem, and that being that book has often been so terribly overpriced to earnings that any P/E on the aggregate index have at times been on the wrong side of 20, or even 25! Comparing to this history and saying, in times of corporate reform and a yen that lost its parachute, that P/E is low is… not particularly honest. Sure, I think Japan looks good, but it also looks incredibly risky and that risk doesn’t diminish when looking at bad source data, where the detailed view would tell you exactly why return on assets and equity is low.
Discussing reform in Japan is however the reason that article deserves reading. It outlines a very bullish best case scenario for Japan, and some potential areas that we could see getting a lot more focus in the election (healthcare deregulation, electricity generation reform, and visa requirement relaxation) besides the corporate tax rates and trying to measure just how much shareholders are rewarded for holding stocks. It is largely old hat on my links, but the indication of what sectors might see an upswing are definitely a good preparation for market participants as Tokyo seems to have gone mum. I do have to echo the sentiment though – if reform is for real this time, then there are few better words to salute such developments with than “Banzai!” The corporate earnings growth comparison is also really rosy, so that is something else to look out for.
Political and electoral reforms:
Finally, we get the real acid test of Abe’s ability to get reform done and build public support as a leader. Leadership is part decisive action and part ceremonial posturing. His decisive action was good on the decisive part, less so on any political action, which is why he’s still having the third arrow of Abenomics in the quiver and I go on and on about reform like a broken record. Ceremonial posturing has honestly speaking been handled so ineptly with the Senkaku/Diaoyu issue, unapologetic historical views and continued shrine visits that he might as well have told some of his main export markets to just keel over and die… This hasn’t been overlooked in Japan and reversing some of this ahead of the APEC meeting has strengthened his position, at least domestically and it will probably open up more trade. As I wrote above, his Womenomics policies have taken some pretty big hits on the chin, but if he puts in one or two female economists in the BOJ, I think the symbolic meaning behind it would really cement his power and help Japan get behind reform. In some aspects, politicians can easily lead, and this is one of the areas, given the near-governmental style of decision-making that seems to permeate Japan.
On the more substantial front, I don’t really expect the farm lobbies, rural communities or pensioners as electoral groups to be messed with too much under LDP rule, given that those are typically LDP voters. One can always hope, but given that after every election the electoral system gets attacked (and keep in mind, Japan has had a few elections the last decade…). Yet nothing happens. I guess the powers that be simply want the system to work as it does now, and can still enjoy the opportunity of publicly berating the election winners when something goes wrong.
Given the odds and Japan’s demographics, I’d much rather hold my breath for corporate tax and governance reform, than Japanese electoral reform…