by Keita Kubota, Managing Director and Naoto Saito, Senior Vice President, Neuberger Berman
The night after Shinzo Abe announced his intention to resign as Japan’s prime minister due to ill health, Yoshihide Suga was having dinner with Toshihiro Nikai, one of the major faction leaders within the ruling Liberal Democratic Party (LDP).
The Nikai group are said to have dedicated their votes to Suga that night, leading the other three major factions—Hosoda, Aso and Takeshita—to announce their support soon after. Suga, with 70% of the party’s votes, has now been appointed prime minister.
Suga is Japan’s longest-serving chief cabinet secretary, and there is a growing consensus that he will likely further enforce the domestic and foreign policies put in place by Abe, including the “Three Arrows” economic policy.
While there had been some speculation that Haruhiko Kuroda might be replaced at the Bank of Japan, threatening the critical cooperation between the central bank and the government, we think this would be unlikely regardless of who leads the LDP, particularly as Kuroda’s term runs until May 2023.
The 2% inflation target will therefore very likely be sustained. The actual inflation rate before COVID-19 was only around 0.5%, so we think there is a real possibility of further fiscal stimulus. Polls suggest that voters are not yet convinced that Suga will remain in place beyond the remainder of Abe’s term, which would have ended next September, and so he may try to win support with further growth strategies.
In that case, the Japanese economy and equity market could be supported at higher levels than are currently expected. More specifically, Suga’s stated aim is to pursue growth through digitalization and deregulation. We believe these policies should be positive for our investment approach of seeking out the abundant “hidden gems” in Japan’s unique market.
Digitalization and Deregulation
Mobile phone company stocks have declined since Suga became the frontrunner, mainly because he has threatened to increase the Spectrum Usage Fee they pay to the government if they do not lower their service fees. We think Suga, who served as minister of internal affairs and communications from 2006 to 2007, may comment on this some more.
But there is a bigger picture. Lowering telecommunication bills is only a part of Suga’s digitalization plans. Much more significant is the fact that the “GIGA” project, which aims to equip all schoolchildren with laptops, is now up and running, and that 2021 is expected to see Japan begin its 5G infrastructure buildout.
The so-called “e-Government” initiatives, promoting administration and electronic provision of government information, are also likely to accelerate, benefitting system integrators and cloud service vendors. There are even talks about setting up a new ministry dedicated to digitalization.
Suga also plans to use deregulation for regional revitalization, setting up economic special zones, strengthening the agriculture and travel industries, and exploring more policies to address the impact of Japan’s declining population.
For example, the Ministry of Economy, Trade and Industry recently announced new guidelines for business restructuring, partly because more and more companies face succession issues as the population ages, but also because it sees value that could be unlocked from Japan’s “hidden gems” under different ownership structures.
Micro as Well as Macro
But this is not merely a top-down development. Japan’s corporate culture is changing from the bottom up, too, becoming more responsive to shareholders’ interests and beginning to talk in the same environmental, social and governance language as institutional investors. The recent hostile takeover of the struggling dining company Ootoya Holdings by restaurant chain Colowide is a sign of how much more competitive the landscape is now.
Suga’s comments on the potential consolidation of regional banks fit with this push for deregulation and Japan’s changing corporate culture. We think “Suganomics” is likely to bring more of a micro focus to Abenomics, reflecting Suga’s previous experience as chief cabinet secretary. That would reach deep into corporate Japan and could present many mid- to long-term business opportunities.
One recent, high-profile vote of confidence has come from Warren Buffett’s Berkshire Hathaway, which made substantial investments in Japan’s five largest trading companies—a market that Buffett has tended to avoid in the past. They are cheap, offering relatively high dividend yields, and represent a leveraged play on global economic recovery, but the move also implies a positive view on the direction of Japan’s economy and stock market.
We agree. But for those of us with local research capacity and an understanding of the political and economic backdrop, with no linguistic or cultural barriers, longstanding relationships with Japan’s management teams, and a focus on shareholder engagement to accelerate the evolution of its corporate culture, we think the opportunities are far deeper. We believe there are many hidden gems to discover, and the potential for a lot of value to be unlocked.