Japan’s Domestic Political Turmoil versus Stocks

Author: Bill Witherell, Ph.D., Post Date: May 11, 2018
image_pdfimage_print

So far this year, the US equity market has not been affected significantly by the high level of domestic political discord. The volatility we have seen in US equities appears to have been driven largely by concerns about rising interest rates and external factors such as trade war fears. US stocks now are about where they started the year, with the SPDR S&P 500 ETF up 1%.

Similarly, the United Kingdom is struggling with how to proceed with exiting the European Union (“BREXIT”). The question of whether to seek to remain in the customs union is not only an extremely difficult crunch item in negotiations with Brussels, it is dividing the country and even dividing the ruling Conservative Party and its cabinet. That government, headed by Prime Minister May, is barely hanging on. Should the Labor Party come to lead the country, its policies would surely be unfriendly to markets. Yet UK equities have not unduly suffered. The iShares MSCI United Kingdom ETF, EWU, remains up 2.32% year-to-date.

Likewise, across the Channel the popular Macron government in France is facing railroad and airline strikes and numerous demonstrations in opposition to the substantial and much-needed economic reforms that Macron is pressing ahead with in sensitive areas such as labor and pensions. Yet the French equity market continues to outperform. The iShares MSCI France ETF, EWQ, is up 4.1% year-to-date.

In this note we take a closer look at Japan, where the equity market has also so far weathered some very dramatic domestic political storms. Prime Minister Shinzo Abe, who had been riding on high ratings in the polls while pursuing with some sensitive reforms, encountered serious problems when a private school, Moritomo Gakuen, which has a nationalist curriculum, acquired land for a new school from the national government at an 89% discount to its appraised value. First Lady Akie Abe is friends with the wife of the school’s chairman. Opposition politicians charged undue political influence, and the scandal worsened as altered government documents came to light, a Ministry of Finance official who did the altering committed suicide and other documents went missing. Prime Minister Abe is also accused of using his influence to support another school’s application to open a veterinary school.

In late April the opposition parties launched an 18-day boycott of Diet proceedings. They demanded that Minister of Finance Taro Aso resign to take responsibility for allegations of sexual harassment against a former senior Ministry of Finance official. They also wanted Abe’s former personal aide Tadao Yanase to testify about the veterinary school matter. The finance minister is not resigning, but Abe’s LDP Party has agreed to have Yanase testify, though not under oath, on May 10th. The six opposition parties decided to return to the Diet this week, not fully satisfied but recognizing that there is important work to be done, including labor reform legislation.

These political scandals have caused Abe’s approval rating to plummet, although there has been a small recovery recently. Given the divided state of the opposition, the LPD looks sure to remain in power, but Abe’s future is less certain. He has rivals within the LPD that have stepped up their efforts against his remaining as the LPD president. While markets have not reacted to this turmoil, they would pay attention if Abe departed, because any foreseeable LPD replacement would follow considerably more restrictive fiscal policies.

Thus far this year Japan’s equity market has not been swayed by the volatile domestic political developments. The iShares MSCI Japan ETF, EWJ, is up 0.9% year-to-date, similar to the performance of the US market. As in the three markets briefly discussed above, Japanese investors focused less on domestic issues and more on fundamental economic and earnings prospects and on external developments such as trade war concerns and the possibility of reduced tensions with North Korea. While Abe’s future is not certain, investors have confidence in the ability of the central bank, the Bank of Japan, with recently reappointed Governor Haruhiko Kuroda at the helm, to steer the Japanese economy on a wise course.

The Japanese economy is participating in the global economic recovery that is projected to continue at least through this and next year, and in the accompanying strong growth in global trade, which should persist unless a serious trade war develops. Japan’s Nikki Composite Output Index (manufacturing plus services), as reported by IHS Markit, rose in April, continuing a 19-month expansion. Employment and new orders have increased, but economic growth is slowing from last year’s 1.7% annual pace to perhaps 1.5% this year. Business confidence has weakened somewhat, and consumption has lost momentum. The stronger yen earlier this year caused exporters and even some domestic companies to reduce their profit guidance for the current year, but these estimates may well change if the yen’s weakening since mid-March does not reverse. We are maintaining our Japanese positions for now and monitoring further developments closely.

Bill Witherell, Ph.D.
Chief Global Economist
Email | Bio
_______________________

Sources: Goldman Sachs Research, Jeff Usher’s Japan Insider, IHS Markit, Financial Times, CNBC


Links to other websites or electronic media controlled or offered by Third-Parties (non-affiliates of Cumberland Advisors) are provided only as a reference and courtesy to our users. Cumberland Advisors has no control over such websites, does not recommend or endorse any opinions, ideas, products, information, or content of such sites, and makes no warranties as to the accuracy, completeness, reliability or suitability of their content. Cumberland Advisors hereby disclaims liability for any information, materials, products or services posted or offered at any of the Third-Party websites. The Third-Party may have a privacy and/or security policy different from that of Cumberland Advisors. Therefore, please refer to the specific privacy and security policies of the Third-Party when accessing their websites.

Sign up for our FREE Cumberland Market Commentaries

Cumberland Advisors Market Commentaries offer insights and analysis on upcoming, important economic issues that potentially impact global financial markets. Our team shares their thinking on global economic developments, market news and other factors that often influence investment opportunities and strategies.

cumber map
Cumberland Advisors® is registered with the SEC under the Investment Advisers Act of 1940. All information contained herein is for informational purposes only and does not constitute a solicitation or offer to sell securities or investment advisory services. Such an offer can only be made in the states where Cumberland Advisors is either registered or is a Notice Filer or where an exemption from such registration or filing is available. New accounts will not be accepted unless and until all local regulations have been satisfied. This presentation does not purport to be a complete description of our performance or investment services. Please feel free to forward our commentaries (with proper attribution) to others who may be interested. It is not our intention to state or imply in any manner that past results and profitability is an indication of future performance. All material presented is compiled from sources believed to be reliable. However, accuracy cannot be guaranteed.
Loading...