‘Abenomics’ Gets Voters’ Endorsement
Dr. Jan-Carl Plagge, Head of Applied Research
Investors welcomed a strong victory for Prime Minister Shinzo Abe in Japan’s snap elections on Oct. 22, lifting stocks and selling the yen.
The STOXX® Japan 600 Index rose 0.8% on Oct. 23, to a 10-year high. The yen, deemed a safe haven for investors, fell to ¥113.89 to the dollar from ¥113.52. The iSTOXX® MUTB Japan Quality 150 Index, which selects companies based on returns to shareholders and profitability, climbed 0.9%.
Abe’s Liberal Democratic Party-led (LDP) coalition retained a two-thirds majority in the 465-member lower house, local media reported. The result implied a strong recovery for Abe from lower support levels earlier in the year, and will allow him to seek the first constitutional reform in seven decades.
‘Abenomics’ pushing for corporate change
The victory is also an endorsement for Abe’s reforms. Since returning to power in 2012, the Prime Minister has pushed for change in the form of a three-arrow economic plan consisting of large fiscal stimulus, aggressive monetary easing and structural reforms. Part of the reform package is a plan to cut the corporate tax rate and to require companies to adhere to a governance code and target higher return on equity (ROE).
STOXX Ltd. and Mitsubishi UFJ Trust & Banking (MUTB) in 2015 jointly developed the iSTOXX MUTB Japan Quality 150 Index, which tracks businesses with high shareholder returns and good corporate governance. The component selection is based on four fundamentals ratios: ROE, debt to capital, cash-flow-generation ability and net-income stability. Among the four factors, ROE is prioritized.
In the past three years, the ‘Abenomics’ index has beaten the broader Japan 600 index (Chart 1).
Monetary stimulus and fiscal spending ahead
Abe’s win is likely to lead to a continuation of corporate reform and accommodative monetary policy, economists said. The government has called for productivity reform and intensive investment to spur growth in the next three years. Another stated objective of the government is to raise a sales tax to boost spending without fueling a budget deficit.
However, Marcel Thieliant, an economist at Capital Economics, wrote in a note1 after the elections that the outlook for structural reforms in Japan is uncertain given that Abe will now focus on revising the constitution. The LDP wants to change language in the constitution that bans Japan from maintaining armed forces.
Data falsification scandal
Meanwhile, a data falsification scandal at Kobe Steel Ltd.,2 Japan’s third-largest steelmaker, is the latest episode to highlight the country’s weak corporate governance and undermine the public image of ethics in the business world.
Kobe Steel is a member of the STOXX Japan 600 Index but is not included in the iSTOXX® MUTB Japan Quality 150 Index.
Investing in Japan’s physical and human capital
In 2016, STOXX introduced the iSTOXX® MUTB Japan Proactive Leaders 200 Index, which aims to capture the performance of quality companies that also actively reinvest their proceeds in assets and employees. This came after the Bank of Japan fine-tuned its purchase of stocks to put an emphasis on companies that redeploy earnings into physical and human capital.
The iSTOXX MUTB Japan Quality Proactive Leaders 200 has gained 22% in the last two years, compared with 14% for the STOXX Japan 600 Index.
iSTOXX® MUTB Japan Quality 150 Index
iSTOXX® MUTB Japan Quality Proactive Leaders 200
STOXX® Japan 600 Index
MAXIS JAPAN Quality 150 Index ETF
MAXIS JAPAN Proactive Investment in Physical and Human Capital 200 Index ETF
1 ‘Capital Daily,’ Capital Economics, Oct. 23, 2017.
2 ‘As scandal widens, Japan’s Kobe Steel faces key debt test,’ Reuters, Oct. 23, 2017.