Japan Stocks a Buy for Funds Betting on Abenomics Continuity
(Bloomberg) -- Market watchers seem to be voicing a near consensus that Prime Minister Shinzo Abe’s resignation won’t lead to swerves in Japan’s economic agenda.
Local stocks rebounded on Monday after sliding amid increased volatility following the news of Abe’s exit on Friday, and expectations for policy continuity are prompting some money managers to say Japanese shares are a buy. Currency watchers don’t see the yen adding much to its rally from Friday while in bonds land, Treasury yields are seen having a bigger influence on JGBs with the Bank of Japan likely to persist with its ultra-easy policy under Governor Haruhiko Kuroda.
The race to replace Abe has started to take shape as candidates declare their intent to the inner circles. Chief Cabinet Secretary Yoshihide Suga may announce his intentions on whether he’ll seek to step into his ailing boss’s shoes after the ruling Liberal Democratic Party decides Tuesday on the procedure for picking a new leader, Kyodo News reported. Among other names, former Defense Minister Shigeru Ishiba plans to declare soon his intention to run for the election, media reports have said.
“Japan’s policy won’t change dramatically no matter who becomes the next prime minister as the ruling party is making decisions,” said Masafumi Yamamoto, chief currency strategist at Mizuho Securities Co. “There is a perception in the market that Abenomics will carry on if Suga becomes the prime minister.”
The benchmark Topix index climbed almost 2% on Monday after the revelation that Warren Buffett’s Berkshire Hathaway Inc. bought stakes in five Japanese trading companies.
Here’s what investors are saying about the outlook for Japanese assets:
Despite Friday’s losses, the Topix index remains Asia’s second best-performing benchmark gauge in August -- behind Vietnam’s -- amid signs that coronavirus infections in Japan are subsiding.
“There haven’t really been that many opportunities to buy on the dip-- so this could possibly be an opportunity,” said Ayako Sera, a market strategist at Sumitomo Mitsui Trust Bank Ltd. “As long as the BOJ doesn’t change its monetary policy stance, the stock market will remain resilient.”
Nader Naeimi, the head of dynamic markets at AMP Capital Investors Ltd., says there is a “large degree” of continuity within the ruling party. “This reinforces the thesis” that now is the time to buy Japanese equities, he said.
Japanese auto, energy, industrial and transport names look attractive as preference is shifting away from growth stocks, Naeimi said.
His views are echoed by Nicholas Smith, a strategist at CLSA Securities Japan Co. who sees a buying opportunity in stocks.
“The truth is Japan has been remarkably successful in handling the coronavirus and I think the succession is likely to allow a few policy tweaks that are probably in the works anyway,” he said.
Strategists don’t see Japan’s currency adding a lot to its strong advance from Friday. The dollar-yen pair was up 0.2% at 105.57 as of 2:46 p.m. in Tokyo.
“It’s hard to see a sustained break below 105 in the next six months,” according to Ranko Berich, head of market analysis at Monex Europe Ltd. in London. That’s because such a move “would be deflationary and would likely prompt some kind of action from the BOJ, or even embolden Abe’s successor into looser fiscal policy,” he said.
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Mizuho’s Yamamoto said the yen is expected to stay in a downtrend if stocks remain strong. That said, uncertainty over the continuity of economic policy could weigh on stocks and push the yen higher if Ishiba is chosen as Abe’s replacement, he said.
Opinion polls show Ishiba, who had long distanced himself from the Abe administration, is the public’s top choice for the post.
The dollar-yen is expected to find support around 103, while the pair could rise toward 107 at the end of the year, Yamamoto said
Though a surprise, Abe’s resignation “is a one-time, political headline news,” said Daisaku Ueno, chief currency strategist at Mitsubishi UFJ Morgan Stanley Securities Co.
“Dollar-yen direction is determined by where the interest-rate spread might be headed,” he said. “It won’t suddenly break 100 barrier. Should the U.S. not adjust interest rates until after 2023, Japan is unlikely to budge as well.”
While JGBs were sold Friday on Abe’s resignation and also in response to the rise in Treasury yields, it’s important to see whether or not the steepening of the U.S. curve will continue, according to Eiichiro Miura, general manager of the fixed-income department at Nissay Asset Management Corp.
“Moves in Treasury yields could have a long-lasting impact,” he said. “The BOJ could act more proactively and buy more JGBs when yields rise to show its commitment to its monetary policy is intact even after Abe’s departure.”
The Japanese central bank is going to continue with its current monetary easing to meet its objectives, making no immediate changes, despite Abe’s resignation, according to people familiar with the matter.
©2020 Bloomberg L.P.