Can Kishida’s bold “new form of capitalism” really boost Japan’s prospects?

by | Jul 22, 2022

Written by Richard Aston, portfolio manager of the CC Japan Income & Growth Trust PLC

After a tough pandemic, Japan’s economy is going from strength to strength in 2022.

First, we saw the much-anticipated removal of the nation’s prolonged state of emergency. Not only did this pave the way for a return to normal operations for businesses, but it also threw down the gauntlet for the release of significant amounts of pent-up consumer cash.

Then, in May, we witnessed a particularly strong reporting season for FY2021. In fact, despite emerging from a highly volatile period, corporates on the whole boasted what we consider to be strong balance sheets and we believe this shows that they have maintained their commitment to dividend and buyback growth.

And now, as we move into the second half of the year, a third element is working harder than ever to make Japan’s economic backdrop even stronger still: PM Fumio Kishida.

A vision for the future

At a recent speech in London, Kishida outlined plans for a “new form of capitalism”, summarising: “The single message I wish to convey to you is this: The Japanese economy will continue to see robust growth. You can invest in Japan with confidence. Invest in Kishida.”

As is the case with many political speeches, the specific details on exactly how these ambitious plans would be achieved were largely absent. However, as income investors, what was interesting was what Kishida did decide to focus on.

Alongside investment in human capital, green initiatives, and technology & innovation, the PM said a key tenet of his vision for the future would be increasing income.

On its own, this is not surprising, but once again, what was interesting was the potential sources of this additional income that were outlined in Kishida’s speech.

The first was wage growth, which the PM plans to encourage through tax incentives.

To put it bluntly, this would be some achievement; average annual wages in Japan have barely budged in decades and reversing the status quo could be very significant.

Increasing wages could translate into people spending and investing more. This can then lead to “good” inflation as opposed to the “bad” equivalent currently being witnessed in Japan as the war in Ukraine pushes up the price of raw materials and energy.

This could help to put an end to the low rates of economic growth Japan has been suffering for decades now, helping to boost corporate earnings and, in turn, the stock market.

The second potential source of additional income highlighted by Kishida was investment. Specifically, the PM outlined plans to double people’s incomes from asset investments by making Japan’s Nippon Individual Savings Account (NISA) more attractive.

Again, this plan would be some achievement– its estimated that some 1,000 trillion yen is currently held up in bank deposits and cash across Japan.

But it also makes complete sense.

For savers, it addresses the large opportunity cost associated with simply leaving their money in the banking system. Indeed, although they may have got their money back by leaving it in a bank account since former PM Shinzo Abe came into power in 2012, Japan’s equity market has more than doubled over the same period while also generating over 2% of income a year over the period.

Moving at least some of one’s money out of cash and into stocks certainly feels like a no brainer.

For investors like ourselves, accelerated investment into the Japanese stock market helps to highlight the various high quality income stocks the market presents. Indeed, the fact that the market currently trades at a discount to global peers, in part due to a lack of domestic investment, can be a barrier that some foreign investors struggle to see past.

Moreover, with more and more domestic investors and pension funds on the lookout for quality income stocks that can boost their income, the importance of continuing to improve corporate governance standards in Japan will only be further emphasised.

It goes without saying that the continued, and perhaps even accelerated, dividend and share buyback growth that could flow from this only serves to benefit income investors.

Raising Japan’s profile

The outlook for the Japanese economy already looked strong in the face of a return to normality and the release of pent-up consumer demand. Likewise, corporate governance reform was well on track to continue following the resilience of pay-outs both through and in the wake of the pandemic.

As far as we are concerned, Kishida’s growing commitment to a “new form of capitalism” only stands to further support both these areas while also increasing Japan’s standing on the global investment stage.


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