Besides the reduced base effect, the slower growth in the advanced economies in the first quarter also hit Japan, whose GDP contracted for the first time since 4Q 2015. Even if growth has been lower than was expected at the beginning of the year, we remain moderately optimistic because the wage bill keeps on increasing and is rising faster than inflation. The unemployment rate was 2.2% in May. Moreover, firms remain committed to investing, as can be seen in the latest Tankan survey (2 July). Monetary policy stance should not change, as two consecutive years of positive growth have failed to push inflation much higher.
Two risks are currently weighing on this scenario. First, the trade war between the United States and China could get worse and lead companies to postpone their investment and hiring plans. The resulting global slowdown would not spare Japan. Second, the approval rating of Prime Minister Shinzo Abe has fallen, due in large measure to the Moritomo scandal. This has reduced his chances of being re-elected head of his party – the LDP – next September. If Shinzo Abe fails to win re-election, the new party head (who would, de facto, be the new prime minister) could shift Japan’s economic and fiscal orientations.
According to the Asian Nikkei Review, the LDP is expected to formally decide in late August on the schedule of the LDP leadership race. A possible date is 20 September, after a start to the official campaign on 7 September. No official candidates have declared themselves but, among the possible names circulating are those of former LDP Secretary General Shigeru Ishiba, the party's policy chief Fumio Kishida, and Internal Affairs and Communications Minister Seiko Noda.
All candidates seem to be concerned about the side-effects of the monetary policy and exit policy (in terms of timing, strategy,…) while, as far as fiscal policy is concerned, they are, with nuances, stressing the importance of fiscal consolidation, most of them being in favour of the VAT rate hike foreseen for October 2019.
After being constructive on Japanese equities since last summer, Candriam became cautious in June. As said, the leadership vote of the LDP party in September represents a risk for PM Abe, putting pressure on “Abenomics”, a combination of supportive monetary, economic and fiscal policies. This accommodative policy mix remains essential to the Japanese economy. In addition, trade-war risks would hit an export-oriented stock market badly.
As a result, the status of the Japanese Yen is revealing its safe-haven attractiveness, counterbalancing the interest rate gap. Hence corporates can no longer rely on the weakness of the currency to fuel overseas revenues. Japanese stocks show a weakening earnings momentum and are now hardly growing while other regions are expected to register stronger growth.