‘Abenomics’ Continues to Move Japan Forward

“Following on from efforts to structurally improve margins—which are still ongoing—we are now seeing the corporate sector improve its focus on capital management and we are now entering a phase where the Japanese listed corporate sector is structurally moving in the right direction in terms of margins, and gradually also now asset efficiency and leverage,” Musumeci said. “This is where the real opportunity lies, especially because Japanese corporate management teams are becoming enlightened towards the cost of capital and increasing dividends and share buybacks in order to lift RoE”

In conjunction with attractive valuations— and all this against a backdrop where the Japanese market has become appealing in terms of valuation versus the European Union and the U.S.—“we are seeing returns shifting higher and we believe that ‘Abenomics,’ as it represents the strong intent of government/bureaucracy and the central bank and corporate sector to rebuild the strategic strength of the nation via reflation and growth normalization, will continue unabated from a top down perspective,” Musumeci said. “This should generally be fundamentally supportive, in addition to what companies are doing for themselves and for their shareholders.” Winner also highlights the creation of the Nikkei Index 400, which focuses on companies with good corporate governance and high and recurring profitability, as an important step.

“An index that’s been deliberately created to include companies that follow good practices is key for the market, particularly since the Bank of Japan and the large pension funds will be tracking it as they put money to work,” he said.

Structural reforms yet to come as Abe increases mandate

Musumeci expects to see forthcoming reforms for the reconstitution of Japan’s energy sector, including the restarting of some nuclear plants, as well as corporate tax cuts as part of a broader program of tax system reform. Additional measures to assist more females to enter and stay in the workforce are an important step, too, he said, and should help to lift Japan’s GDP going forwar

But for Michael Ball, president and portfolio Manager of Weatherstone Capital Management, it’s still too early to bank entirely on Abenomics being a complete success.

Japan, much more than most countries, is driven largely by what economic policymakers can do rather than market forces, Ball said, and it faces some serious structural headwinds, particularly as Japan has lost its dominant position in both technology and manufacturing. Demographically, too, Japan is more challenged than other nations, since the aging of its population is a serious issue that would have economic repercussions.

Nevertheless, structural reforms to take a while to have any major effect, Ball said, and “the early signs in Japan are positive.”