Japanese Economic Update – 16 December 2014

Abe claims landslide victory at elections amidst a disappointing overall turnout; “a contest of one”

Shinzo Abe claimed a landslide victory at Japanese elections on Sunday night as the nation voted for a further continuation of the status quo.

In detail, the Prime Minister faced little opposition in his campaign to seek re-approval for his Three Arrows program (Abenomics), although voter turnout was disappointingly low according to local observers.

Nevertheless, the victory brings to a head a short-lived period of uncertainty, which now clears the road for the Liberal Democratic Party to push ahead with structural reforms of the economy and the final round of a sales tax hike in 2017.

The resultant political certainty should also help to boost investment within the economy and therefore, aide a recovery from the malaise of the last six months.


2015 Growth outlook & equity markets

In relation to equity markets, the NIKKEI continued to languish in the depths of the 17,000 level for much of the week, with investors and traders seeing little immediate incentive for renewed interest. However, and looking ahead into 2015, the delay to the second increase in consumption taxes could still provide the impetus for further growth, both in terms of economics as well as in terms of equities.

Most notably, the absence of a further tax hike combined with a strengthening recovery in the US, increases the odds of a recovery in both exports and capital spending once into the new year.

Given the economic drag created during the year to date from low capital spending among corporates and a benign environment for exports, the knock on effects of a recovery here could deliver a much needed shot of adrenaline into the arm of Japan’s economy. Such an outcome would be positive for investor confidence and therefore, equity markets.

This is while the weaker yen and the likelihood of corporate tax cuts in Japan create additional  incentives for investors to consider Japanese shares in 2015. Most notably, many corporate earnings projections are based upon historical projections for exchange rates, with the average being USD/JPY 105.

However, in recent weeks the dollar yen exchange rate has reached highs 121.00 and while having pulled back slightly, it continues to hold a bias toward the upside. This could provide a further boost to the earnings performance of large corporates in Japan, which could in turn provide an additional boost to Japanese equities come reporting season.

NIKKEI // 10 Minute Intervals




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