In addition, there are other positive catalysts for stocks going forward. Japan’s giant pension fund has committed to doubling its allocation to stocks, which should result in a strong boost to flows. Companies are focusing more on raising shareholder return and are aggressively deploying cash — buying back shares and raising dividends to their highest level in six years. In addition, there is more merger and acquisition activity, better earnings, improved corporate governance and more women on the payrolls. At the same time, promised labor market liberalization should increase wages — and consumer spending.
A Tricky Path Ahead
While Abe and his party now have the time and the mandate to implement their agenda, they will need to navigate the path ahead with care. I’m keeping my eye on two things. The first is the potential for “bad” inflation brought on by the plunging yen and rising import costs, which could curb spending. The second is Japan’s massive national debt, currently around two times GDP. Rates need to stay low, and the recovery to continue, in order for the country to service its debts. (See our interactive chart for more detail on the economy.)
That said, we think these risks are low, with more potential upside than downside. If you’re looking for a way to access the Japan market, consider iShares MSCI Japan ETF (EWJ) or its currency-hedged sibling, the iShares Currency Hedged MSCI Japan ETF (HEWJ).
Heidi Richardson is a Global Investment Strategist at BlackRock, working with Chief Investment Strategist Russ Koesterich. She also leads the iThinking initiative for iShares. You can find more of her posts here.