For all of you who are wondering what Abenomics is or whether it is a real word, the term was coined when the Japanese Prime Minister Shinzo Abe, who was elected a second time on Dec. 26, 2012, vowed to lift the two-decade-long stagnated Japanese economy out of the doldrums. He announced a three-pronged approach to uplift the economy:
- Monetary Policy: He introduced a 10.3 trillion yen stimulus package to help jump start the economy.
- Fiscal Policy: He appointed Haruhiko Kuroda to the head of Bank of Japan, who rapidly instituted a 2 percent inflation target rate.
- Economic Growth: Abe introduced phased-in corporate tax cuts and implemented a bigger push for women and foreigners in the workforce.
While the first and second steps were successful as designed, it is yet to be seen if they are a recipe for success. Introducing a monetary stimulus leads to large-scale spending on what may not be the best utilization of money that Japan does not have. Funding for projects with dubious returns or benefits has been sanctioned and monies started to be spent.
As a result, the yen has dropped by more than 25 percent compared with the U.S. dollar. This has led to a euphoric TOPIX and the Japanese Stock markets have rallied by more than 50 percent in the past 18 months. As a result, stocks are tremendously overvalued, but therein lies the secret gem. We will get to that in a moment.
The second arrow of reform is a curse disguised as economic reform, in my opinion. Japan is the oldest economy of the world. The median age of a Japanese citizen is 44.6. Only Monaco has a median age higher than Japan does. Everywhere else is lower — the median age in the United States is 36.9, China is 35.2, India is 25.9 and Brazil is 30.5. As more people are older and retired in Japan, is it the smartest thing for a government to raise inflation and make everything more expensive for many people who survive on pensions that are not matching inflation?
So the second arrow is also a major problem in Japan with serious consequences. As a result of the inflation that took hold in Japan, personal consumption has declined, as people cannot afford to buy goods. This has led to negative GDP in Japan recently. I would not term that as success.
It is hard to find any good news or feel-good stories within the Japanese fiasco, but there is one silver lining that can be utilized for some short-term gains.
As a result of the fiscal stimulus policies, the government has sweetened the pot by handing out incentives to their corporate buddies. Corporate balance sheets have high cash balances and low leverages, equity risk premiums are still quite high in Japan and return on equity has jumped back up to all-time high levels. All of these factors bode well for stock buybacks. I see many companies announcing stock buybacks in the next several months.
In my view the sectors where you can see the stock buybacks occurring will be consumer staples, technology and industrials. I would recommend creating a basket of stocks that fit into these sectors and buying an allocation into them, as I expect the stock prices to rise even further.
I would suggest companies such as Asahi Group, Itochu, Toda, Trend Micro, Shizuoka Bank, Konica Minolta, etc.
Invest with confidence and prosper!
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