Japan’s Prime Minister Shinzo Abe won a decisive victory on Sunday. His Liberal Democratic Party now controls both houses of Japan’s parliament, giving Abe a mandate to transform Japan.
A big part of that transformation will be centered on Japan’s economy. Abe has steadfastly promised to break the island nation out of its decades-long struggle with deflation.
Since Abe took office, Japanese stocks have been on a tear. But with the recent election outcome strengthening his base of power, Japanese stocks could still move higher from here.
The three arrows
Abe’s plan to revive Japan’s economy is based around “the three arrows.” They are:
- A more aggressive Japanese central bank
- More government spending on infrastructure projects
- Business (labor, regulatory) reform
All three could support Japanese stocks. In fact, investors have already seen how much the Bank of Japan can influence the country’s Nikkei 225 stock index. Year-to-date, the index is up over 40%, largely due to the Bank of Japan’s explicit inflation target.
The other two could be more difficult, but with Abe consolidating power, he has a better shot at pushing them through. The net effect could be to stimulate Japan’s business activity, and make Japanese companies more profitable.
Sony Corporation (ADR) (NYSE:SNE) is in the midst of a turnaround
Japanese electronics giant Sony Corporation (ADR) (NYSE:SNE) is in the midst of a turnaround. The company is attempting to update its products and restructure its operations so that it is better able to compete with its South Korean rivals Samsung and LG.
Shares of Sony Corporation (ADR) (NYSE:SNE) have outperformed the Nikkei 225 — they’ve more than doubled this year!
Much of that is likely due to Abe’s actions. Japan’s currency, the yen, has weakened significantly against the dollar. Last fall, the yen was trading at about 80 per US dollar; today, it’s around 100.
That weaker currency gives Sony Corporation (ADR) (NYSE:SNE) the edge — its electronics appear cheaper to foreign buyers.
There’s also the Dan Loeb effect. The activist investor has been pressuring Sony Corporation (ADR) (NYSE:SNE) to do a partial spinoff of its entertainment division. Loeb believes that it’s undervalued, and that the unit would perform better if management had a bigger stake in the outcome.
Traditionally, activist Americans have a difficult time getting their way in Japan. But with Loeb fresh off a big Yahoo! Inc. (NASDAQ:YHOO) win, perhaps he’ll be successful with Sony Corporation (ADR) (NYSE:SNE).
A weaker yen could give Toyota Motor Corporation (ADR) (NYSE:TM) the edge
As with Sony’s electronics exports, a weaker yen could benefit Toyota Motor Corporation (ADR) (NYSE:TM)’s cars. Last week, at CNBC’s Delivering Alpha Conference, hedge fund manager Mark Kingdon praised the Japanese auto stocks, noting that they would benefit strongly from Abenomics.