Abe aims wide but firms hitting mark

This article is part of
Investing in Japan - October 2016

Abe aims wide but firms hitting mark

Kyujutsu, or Japanese archery, is a distinguished tradition that stretches back centuries. But one Japanese bowman has been wide of the target recently. In 2013, Japanese prime minister Shinzo Abe announced “three arrows” of monetary, fiscal and structural policies. These were aimed at ridding Japan of the stagnation that has beset its economy for more than two decades.

Unfortunately, Mr Abe’s three arrows seem to have missed their mark. We’ve had monetary stimulus in the form of quantitative easing and negative interest rates; fiscal stimulus through increased public works; and efforts to cut bureaucracy and liberalise the labour market. But none of these appears to have worked. Indeed, the goal of returning inflation to 2 per cent now seems further away following a period of yen strength and falling energy prices globally.

The Japanese economy has entered recession four times in the last five years, and twice since Mr Abe took charge. And there’s little sign that we’re getting any closer to the bull’s eye of the 2 per cent inflation target set by the Bank of Japan (BoJ). 

Over the summer, Mr Abe and BoJ governor Haruhiko Kuroda let fly one more dart, in the form of a ¥28trn (£215bn) stimulus package. This includes ¥7.5trn of direct spending, notably on infrastructure. Ports are to be upgraded; agricultural exports are to be encouraged; hotels are to be built; and transport networks are to be improved.

Will it work? It may help. Current expectations are that the measures will add around 1.5 percentage points to growth in gross domestic product over the next two years. And the expansion of the BoJ’s asset-purchase scheme to include exchange-traded funds should help to boost share prices.

It is sometimes too easy to become distracted by the macroeconomic picture. While Japan might have become notorious for its sluggish economy, it still boasts a host of world-famous companies and market-leading brands: Sony, Mitsubishi, Toyota, Honda, Hitachi and Nissan, for example. Beyond the big names, corporate Japan is home to many unsung heroes – smaller, specialist companies bringing expertise to a global client base.

Many of Japan’s companies are actually in remarkably good health. Two decades of economic stagnation has taught the country’s corporate leaders some harsh lessons, from which they have learned well. Because Japanese companies have had relatively little opportunity to access credit since the asset price bubble burst in 1991, they have had to become self-reliant, with a focus on generating cash from their own operations. This means these firms now boast strong balance sheets and robust cashflows.

As well as improving their financial health, Japanese companies have also abandoned some of the idiosyncratic management traditions that made them less attractive in the past. Corporate governance has improved significantly. Company managements are more approachable than they used to be, and the increased recognition of the importance of a more investor-friendly attitude is reflected in higher dividend payouts and sharp growth in share buybacks.