Investing in Japan constitutes a geared play on global trade prospects. That is according to Nick Smith, the Japan Strategist of CLSA, at the firm’s Hong Kong conference this week. He added that a strong yen usually accompanies a strong stock market, although, for now that link has been dislocated.
Since the merger this year of the Tokyo and Osaka exchanges, Smith hasn’t noticed any changes that would affect the ability of buy-side traders to accumulate positions in Japanese equities.
In terms of market prospects, he pointed out asset prices are still not far off multi-decade lows and that the political landscape in Japan makes it propitious for the government to implement further reforms, such as enforcing a Consumption Tax, which Smith said is a “done deal”, although is not officially in place yet.
A similar tax, enacted in 1997, was the prelude to Japan being subjected to a sharp jolt of deflation. Smith also believes that corporate tax cuts are highly likely, and that signs of vacillation on Abe’s part are a gambit to secure consensus and support from Japan’s economist community.
Japan has the second highest corporate tax rate in the OECD. Only one out of four Japanese companies pay tax.
“Part of the reason for so few paying tax is because the companies are basket-cases and are being propped up. I don’t consider that to be kindness,” said Smith.
The Abe government has a 68% political majority that can enable it to roll through any measures. The government, being able to control all fiscal and monetary policy, as a result, has a central bank whose assets are targeted at Y300 trillion by the middle of 2014. That is double the level of the beginning of 2013.
However, the Abenomics’ dream of an inflationary environment in Japan is still not reality. “Japan’s GDP deflator index has been positive in only six of the last 74 quarters,” said Smith “at present, Japan is only experiencing mild inflation (approximately 1% per year) because of increased energy costs.”