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JAPAN s Prime Minister, Shinzo Abe, won a landslide victory in parliamentary elections in December 2014, after his victory in the upper house elections in 2013. In firm control of both houses till December 2016 and as Japan s Prime Minister for several more years, Abe would have three years to implement his radical, and much-needed, economic plans. He remains unusually popular in a country which has had 15 Prime Ministers in 20 years prior to 2012. Abe also found a supportive ally in Haruhiko Kuroda, the Bank of Japan Governor, who has religiously kept faith with Abe s bold revolution. THE early results of Abenomics were startling. The Nikkei 225 Index rallied nearly 70% 6 in less than 12 months, and a restrained yen has boosted exports and raised corporate earnings. Prices of household durable goods in Tokyo rose in November 2013 for the first time in two decades! An air of optimism has returned to Japan. Hitting the early targets has given Abe enormous cachet to push through his reform agenda with greater conviction. 6 money.cnn.com/2013/05/24/ investing/markets-stocks-outlook/, 27 May 2013 11 12
OVER a five-year timeline, Abe has targeted corporate tax to be reduced from about 36% to 24%. The existing rate is currently the 2nd highest in the Group of Seven, after the U.S., and compares with 23% in the U.K and 24% in South Korea. 7 Wages will also be adjusted upwards to boost consumption and drive growth. Womenomics bringing more women into the workforce as well as into the boardrooms is a vital component of Abe s reform package to combat a shrinking and ageing labour pool. Of the one million new entrants to the workforce in 2013, some 70% 8 were women. In September 2014, Abe named five women to his new 18-strong cabinet, leading the way to make better use of its highly-educated but underemployed women. IN APRIL 2014, a sales tax hike was introduced to help rein in massive public debt and fund the bulging social security costs. The levy was raised from 5% to 8% the first increase since 1997. In doing so, Abe has managed to escape the traditional kiss of political death for past premiers who introduced the unpopular hike. Once again, it bears testament to the confidence Japan has in Abenomics, and the ability of Abe to unite his people for the common goal of digging themselves out of a 15-year downward economic spiral. 7 www.bloomberg.com/news/2014-06-24/abedeclares-end-of-deflation-as-growth-plan-confronts -skeptics.html, 25 June 2014 8 online.barrons.com/articles/ SB50001424053111903301904579562023307120900, 24 May 2014 13 14
STOCK VALUATIONS REMAIN LOW WHILE Corporate Japan is delivering positive returns, equity valuations remain below their historical average. The Japanese market currently trades on an estimated one-year price-to-earnings ratio of 13.79 times, largely below its long-term average of 24.88 times. 9 Over 50% of companies are trading below the value of their assets. Bargain hunters who exercise stringent due diligence would be able to pick up some exceptional value buys. 9 Bloomberg, 22 October 2014 WITH clearer signs of sustained economic recovery, the overall level of Japanese equity ownership by individuals and institutions should increase over time. Currently only 8% of roughly USD15 trillion 10 in aggregate Japanese household assets are invested in equities and large institutions have similarly low equity exposure in their portfolios. With the introduction of the Nippon Individual Savings Account (NISA) to incentivise the historically risk-averse Japanese, Nomura Research Institute estimates that a figure as high as USD690 billion 10 could be drawn into the market. 10 hennessyfunds.com/resources/docs/press/japan -whitepaper.pdf, February 2014 15 16
Invest in Japan s new corporate ethos The JPX-Nikkei Index 400, a new stock price index focused on the return on equity (ROE) and management quality of its underlying companies, was launched at the start of 2014. It comprises 400 companies selected from about 3,400 stocks listed on the Tokyo Stock Exchange, including those listed on the markets for start-ups. The index components are subject to an annual review. The jpx px- nikkei index 400 Stocks are selected through a rigorous selection process based on ROE, which measures how efficiently shareholder capital is being used, and on the quality of each firm s corporate governance frameworks both criteria considered vital by global investors. As such, the JPX-Nikkei Index 400 is now being used as an investment benchmark by Japan's Government Pension Investment Fund (GPIF), the world's largest pension fund. Exchange traded funds linked to the index are also expected to grow. For investors with a mid- to long-term investment horizon, the index offers broad exposure to Japan's corporate A-listers an elite class with the potential to further boost their intrinsic value and shareholder returns.
The 3RD3 Arrow of the Abenomics Growth Trillions Strategy of Yen Companies Cash and Deposits * (FY2000 FY2013) Aspiring to be included in the index, Japanese corporations are expected to take greater care in how they allocate their resources and, as a result, many will adopt a more positive stance on shareholder return. The index is therefore expected to enhance the corporate value of Japanese firms in general, not just those included in the index. In addition, Japan s Prime Minister Abe is exhorting companies to make better use of their abundant cash reserves by increasing wages and improving shareholder returns through dividend hikes or share buybacks. It is hoped that this will result in sustained economic growth and ultimately push up stock prices. The JPX-Nikkei Index 400, one of the components in Abe s 3rd arrow strategy, ultimately aims to bring investors into the market. *Firms in all industries, excluding finance and insurance, with more than 1 billion (approx. US$ 9.8 million) in capital. Source: Nikko AM; Financial Statements Statistics of Corporations by Industry, Ministry of Finance, July 2014. Stock Selection Process Quantitative Evaluation Based On: 3-year average ROE 3-year average Operating Profit Market Capitalisation Qualitative Criteria: Appointment of independent external directors Employment of global accounting standards Disclosure of financial statements in English to be continued...