Abenomics is a new phenomenon, only six months old, and is the beginning of a long process aimed at ending Japan’s two decades of deflation and economic stagnation and paving the way to a strong and sustainable economy, and a high quality of life with safety and security.
Nomura believes Japan is undergoing structural change that will seek to alter its long-term economic trajectory. The current juncture is probably the best opportunity Japan will get – with the private sector in healthy shape, the global economy picking up, and greater appreciation of the need for radical policy change than in the early-2000s.
Recent surveys conducted by the Pew Research Center have shown positive results that after more than two decades of economic turmoil and political transition in Japan, the public’s mood is showing some decided improvement. Japan now has a strongly popular political leadership, and there are indications of a growing Japanese aspiration to play a larger security role on the world stage.
Nomura View on Abenomics
A key question for us now is how Japan’s government will measure the success (and more importantly, demonstrate to the market) of structural reforms in the near term. In the short-term, Nomura believes PM Abe’s cabinet approval rating, market dynamics (both interest rates and equity prices) and the nascent signs of progress towards specific policy targets (such as the BOJ’s 2% CPI objective) are useful yardsticks.
Nomura sees Japanese equities offering both growth and value and maintain an Overweight for Japan allocations in their global recommended allocation. The ongoing revival is being reflected in an upward revision of GDP growth and corporate earnings forecasts (see Figure below) and Nomura Japan equity strategy team highlight their selection of stocks that are most exposed to these growth strategies (see Figure below).
Key takeaways from Pew Research Center’s Survey
Prime Minister Abe Strongly Popular
Prime Minister Abe is seen favorably by 71 percent of the Japanese public, with no evident gender gap, generation gap, class difference or rural-urban split in his support. This positive public assessment of the Japanese leader is widely shared among both men and women, people with a college degree and those without a degree and low, middle and high income individuals. Notably, Abe, whose Liberal Democratic Party’s original political base was overwhelmingly positive in rural areas, now does equally well in metropolitan areas and in peripheral cities, towns and villages of Japan.
Increasing Support for Constitutional Change
As public sentiment about the economy changes, Japanese attitudes about the country’s strategic role in the world are evolving. For some time, there has been a robust public debate within Japan about whether Tokyo needs a military capacity and a willingness to engage in security operations commensurate with the country’s stature as the world’s third largest economy. But such ambitions have long been constrained by Japan’s post-World War II constitution.
Article 9 of the current Japanese constitution states that Japan renounces war as a means of resolving international disputes and will not maintain land, sea or air forces.
Notwithstanding such strictures, Japan does have a large Self-Defense Force. And, in recent years, these forces have been deployed internationally to provide humanitarian assistance and in peacekeeping operations sanctioned by the United Nations.
A majority of Japanese (56%) oppose changing their constitution so that Japan could officially have a military and declare war. But that opposition has declined by 11 percentage points since 2006, when 67% were against constitutional revision. Men (45%) are much more willing to support constitutional revision than are women (28%).
Asia/Pacific Views of Japan
Looking outside of the country, Japan’s image in the region is mixed. Japan is generally seen favorably in much of Asia, but its immediate neighbors – China and South Korea – are highly skeptical of Japan. They are unfavorably disposed toward Abe. And, both the Chinese and the Koreans are critical of what they see as Japan’s failure to atone for Japanese military actions in the 1930s and 1940s.