Market Insight June 15, 2017

Three ways that foreigners classify Japanese stocks: by a process of elimination, relative stability, and bento box

Hajime Takata, Chief Economist

On a recent trip to the UK, I was struck by the increase in the number of Japanese restaurants such as Itsu, Wasabi, Wagamama and Yo! Sushi in the City of London. These Japanese food chains are popular in the City, and even the term ‘Bento’ is now understood in English. I have continued to visit and exchange opinions with foreign investors since the launch of Abenomics in 2012, yet I have recently noted the many comments that suggest reduced interest in Abenomics, and a lack of excitement about Abenomics and Japanese stocks. The following chart illustrates the trading trends in Japanese stocks by investor type. The substantial amount of net purchases of Japanese stocks by foreigners from 2012 until mid-2015 was referred to as ‘Abenomics trades’, and underpinned the virtuous cycle of a weak yen and strong stocks. Although this trend had reversed with foreign investors becoming large net sellers of Japanese stock from late 2015, the advent of the Trump administration in 2016 prompted a return to net buying with an increase in the pace of net purchases in April and May 2017. There are 3 key phrases that express the cause: by a process of elimination, relative stability and bento box. Investors have reevaluated their stance since 2015 because they had become underweight due to net sales of Japanese stocks. First, index players and others are looking at Japanese stocks and Japanese real estate due to a process of elimination given the rise in global stock prices. Second, a feature of is that despite the low expected levels, prices are relatively stable. Third, although there is no ‘main dish’ in Japanese reforms, Japan’s growth strategy provides a variety of opportunities just like in a bento box. High expectations for Japan had been maintained by US and European investors to date, but they now must confront reality and gradually lower their expectations. This could also lead to revised perceptions about Japan, which also remains stable on the political front. Foreign investor views of Abenomics have generally been along the lines of “not meeting initial expectations, but better than before”. Japanese stocks are currently not considered to be overvalued on a worldwide basis in terms of valuations such as PER. In fact, they are substantially undervalued compared to the US. The Sharpe ratio (return/risk) is a measure for calculating risk-adjusted return used in the investment world. In the case of Japan, expected profits are low, but risk is also low, so it is possible that Japan’s status has been improving in relative terms from a global perspective. While it is not possible to have high expectations for Japan, the BOJ has also been making large purchases of ETF, and Japan is no doubt currently seen as a market that does not warrant a sell off. In addition, despite the lack of symbolic reforms as there were under the Koizumi administration, some foreign investors who are long-term Japan watchers are focused on the indication of long-term growth from a menu of small ‘side dishes’ that are not prominent like a bento box.

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[ Chart 1: Trading in Japanese equities by investor type ]

Domestic financial institutions (trust banks, banks, life & nonlife insurers) Industrial corporation (JPY100 billion) Investment trusts Individuals 30 Foreigners

Net buyer 20

10

0

▲10 Net seller ▲20

▲30 (CY/Mo) ▲40 13/Jan 13/May 13/Sep 14/Jan 14/May 14/Sep 15/Jan 15/May 15/Sep 16/Jan 16/May 16/Sep 17/Jan 17/May

Note: 1st and 2nd Sections Source: Made by Mizuho Research Institute Ltd. (MHRI) based upon Stock Exchange

From a stability perspective, attention also needs to be given to political stability. Chart 2 illustrates the terms of office of post-war Japanese prime ministers, highlighting the fact that current Prime Minister Abe is Japan’s 3rd longest serving post-war prime minister. This is a big change from 2006 until 2012, when prime ministers changed every year and Japan was considered to have the most unstable government amongst the G7.

[ Chart 2: Terms of office of post-war prime ministers in Japan (Top 10) ]

Nov. 9, 1964～Jul 7, 1972 (1st～3rd) 1. Eisaku Sato 2798 May 22, 1946～May 24, 1947, Oct 15, 1948～Dec 10, 1954 (1st～5th) 2. 2616 Sep 26, 2006～Sep 26, 2007, Dec 26, 2012～ (1st～) as of June 15, 2017 3. Shinzo Abe 1999 2471 Apr 26, 2001～Sep 26, 2006 (1st～3rd) 4. 1980 Nov 27, 1982～Nov 6, 1987 (1st～3rd) 5. 1806 In the case of re-election at Jul 19, 1960～Nov 9, 1964 (1st～3rd) the LDP presidential 6. election in Sep 2015, 1575 serving as prime minister Feb 25, 1957～1,Jul 19, 960 (1st～2nd) for a 3-yr term until the end 7. 1241 of Sep 2018 Jan 11, 1996～Jul 30, 1998 (1st～2nd) 8. 932 Jul 7, 1972～Dec 9. 1974 (1st～2nd) 9. 886 Jul 17, 1980～Nov 27, 1982 (1st) 10. Zenko Suzuki 864 (days)

0 500 1000 1500 2000 2500 3000

Source: Made by MHRI based upon the and His Cabinet website and various reports

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Prime Minister Abe’s support rating is also at the upper level amongst the G7. At the G7 Summit held in Italy in May, four of the leaders who had attended G7 meetings a year earlier had been replaced. Prime Minister Abe is only second to Chancellor Merkel in the number of G7 meetings he has attended. There is general consensus that the amendment of the LDP Rules for Election of President will allow Prime Minister Abe to serve as Prime Minister until 2021. If this occurs it would make Prime Minister Abe the longest serving Japanese prime minister since the Reformation. This also supports the idea that political capital could lead to reforms. Monetary easing continues, but there is a surplus of funds worldwide as companies stockpile capital. Consequently, funds appear to be flowing into Japan by a process of elimination.

[ Chart 3: Comparison of G7 leaders ]

US Canada France UK Germany Italy Japan

Christian Liberal Party of Conservative Liberal Administration Republican Party ― Democratic Union Democratic Party Canada Party Democratic Party of Germany

President President Donald Prime Minister Prime Minister Chancellor Angela Prime Minister Prime Minister Leader Emmanuel Trump Justin Trudeau Theresa May Merkel Paolo Gentiloni Shinzo Abe Macron

Term of office 2021/Jan 2020/Nov 2022/May 2020/May 2017/Dec 2018/May 2018/Sep

Source: Made by MHRI

This publication is compiled solely for the purpose of providing readers with information and is in no way meant to encourage readers to buy or sell financial instruments. Although this publication is compiled on the basis of sources which we believe to be reliable and correct, the Mizuho Research Institute does not warrant its accuracy and certainty. Readers are requested to exercise their own judgment in the use of this publication. Please also note that the contents of this publication may be subject to change without prior notice.

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