Prime Minister Shinzo Abe's reforms have improved Japan's economic situation. Will the country also benefit from this for the period after Covid-19?
The Covid-19 pandemic cast a very long shadow over the global economy, with severe humanitarian and economic consequences. Japan has not escaped unscathed, with the unavoidable delay of the 2020 Tokyo Olympics being a high profile and symbolic setback that has yet to be fully addressed.
That said, the ongoing pandemic should not, in our view, obscure important developments that took place prior to the outbreak of the virus, where Japanese policy makers tackled pressing, longstanding challenges.
There is ample evidence, for example, that since 2012 Japan has undergone meaningful, structural change. Starting in 2012 under the policy umbrella of "Abenomics", a host of reforms were undertaken while fiscal and monetary policy were aggressively loosened. There are many policy areas that witnessed formidable change, but a few notably stand out. For example, in 2010, World Bank data shows that Japan attracted international tourist arrivals of 8.6 million, which is relatively low when compared to countries like Spain and France (in 2010 they attracted 94 and 189 million international tourist arrivals, respectively).
In part by liberalising tourist visa requirements, Japan was able to see its foreign visitor numbers surge to 32 million by 2019, according to the World Bank. From an economic perspective, this means that international tourism related income equated to 5% of GDP, coming from negligible levels before Abenomics. It goes without saying that the sudden stop of cross border travel due to the coronavirus has hit Japan's tourism aspirations as hard as elsewhere – but we remain confident that given the rich and varied cultural resources that Japan is famous for, we will see a powerful recovery in tourism once the pandemic passes.
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Another area that has seen formidable change is the participation of women in the labour force. Pre-Abenomics (2011), the female labour force participation rate was 63%, notes the World Bank. By actively encouraging and enabling women to take up salaried employment, this figure increased by almost ten percentage points by 2019. With an ageing society and overall shrinking population, increasing women's role in the job market is an important development, in our view.
Indeed, Japan's labour market entered into the global pandemic from a position of strength: the job-to-applicant ratio (which is arguably the most commonly used metric to gauge the job market in Japan) was near a historical peak, as the chart shows. In other words, for every job seeker in 2019, there was 1.6 available positions. Covid-19 saw a sharp retrenchment of labour demand – as seen in most countries – but the ratio managed to stay above the important "1" threshold. This implies that Japan was able to avoid the severe shocks to employment as seen in other G-7 economies, notably the United States and Canada.
Another important misconception, in our view, is that financial markets and real estate, in particular, in Japan have not moved forward. Much has been written about the long-lasting consequences of Japan's 1980's "bubble economy" bursting, ensuing bouts of deflation and economic stagnation in the 1990's. However, this chapter can be followed now by a clear revival in asset prices, including property. The below chart shows the price per square meter of new condominiums in the Tokyo region, and a notable acceleration since 2012 is evident. The main stock market index, the Nikkei 225, shows a similar pattern.
We are now in the post-Abenomics era in Japan, with Yoshihide Suga as Prime Minister as per September 2020. Therefore, it is opportune to ask what the future may hold and what investors can expect as the post-Covid-19 global recovery takes shape. For one, we anticipate that the broad intentions of Abenomics will continue under the Suga government. Second, Japan's economy (similar to Germany) is well known to be very export-driven, with an exports-to-GDP ratio of approximately 18%, according to the Cabinet Office. Currently, manufacturing exports are enjoying a global boom as countries gradually re-open and consumers and companies go back – as much as possible – to their pre-pandemic norms.
It follows that the Japanese economy should be well positioned to take advantage of the current uplift in consumer and corporate demand. As such, the financial market consensus is that, according to Goldman Sachs, Japanese corporate profits may grow +46% in fiscal year 2021, considerably outpacing Europe (+33%) and the United States (+22%).This can partly be explained by the composition of the Japanese stock market: based on data from Morgan Stanley, so-called "Cyclicals and Value" equities form 53% of the index (as per November 2020). As the label suggests, these are companies that rise and fall with the global cycle – if we are right that 2021/22 will see a strong economic rebound as the world awakes from its Covid-19 malaise, then Japan should firmly be on investors' radars.