Japan is engaged in extremely aggressive monetary policy in the hopes of facilitating structural reforms in an economy that has stagnated for over two decades. There is a common belief that the Japanese equity market is rallying because international investors are trading into stocks while shorting the yen simply to take advantage of Japan’s QE program. Our Director of Research, Brendan Connor, recently returned from Tokyo with a fundamentally different impression and discusses the drivers and opportunity set in Japan today.
Thoughts on Japan
I recently spent a week in Japan meeting with a number of investment managers and business contacts. We discussed changes in the country which, upon further reflection, may seem less obvious to the outside world. This was confirmed in several meetings after I returned, where investors with some interest in Asia seemed completely unaware of the policy changes that have taken effect in the past several quarters. This is exciting stuff. Investors are clearly aware of Japan’s massive quantitative easing program and its effect on asset prices, but in my view, there are further nuances to this policy, and its channels, which investors have yet to fully appreciate.
Japan is not a place one considers ripe for rapid change. Over the past twenty years, Japan has been unable to sustain any significant economic reforms, generate growth, or keep a government in power. Since 1989, the average Japanese Prime Minister held the office for 560 days, with a median term of office of 418 days. Those figures drop materially if you exclude Junichiro Koizumi of the Liberal Democratic Party who held office for 1979 days. There have been five Prime Ministers in as many years since 2009! Returns on equity for Japanese equity markets have been among the lowest globally, while equity multiples reflect decades of mired performance. This was status quo in the memory of institutional investors globally.