The “Abe Trade” has been a powerful theme since late last year when Shinzo Abe began to surge ahead in the polls to be prime minister of Japan. Even with the recent reversal in the markets, on net stocks are up, bonds are down, and the yen has sold off. Given the crosscurrents, analysts have struggled to interpret the latest trade data.
It’s interesting to see the divergence in the media coverage. Some reporters have been highlighting how the weak yen and the surge in exports vindicate Abe’s policies. Here’s Bloomberg’s headline: “Japan Exports Surge Most Since 2010 in Boost for Abe: Economy.”
Others are saying the exact opposite. The weaker yen also means that imports are more expensive. Energy imports, in particular, are up a lot since most of the nuclear utilities are still offline after Fukushima. Here’s the AP’s take: ” Japan’s trade deficit rose nearly 10 percent in May â€¦ highlighting the challenge Prime Minister Shinzo Abe faces in revitalizing manufacturing.”
No doubt the drop in the yen is a mixed bag. But Abe’s reforms are just barely getting off the drawing board. Real reform takes years to show up: airline deregulation in the US, labor market reform in Germany, post-Communist shock therapy in Poland.
We think Abe’s the real deal but it’s far too soon to know how successful his reforms will be.
Some of the skeptics were rightly disappointed by Abe’s recent “third arrow” proposals. They certainly were timid compared to his earlier moves. Part of the reason might be political tactics: an important milestone is coming on July 21 when Japan has elections to its upper chamber. Abe already controls the lower house and the Bank of Japan; adding the upper chamber would give a him a clean sweep. He might just be tempering the reform rhetoric in the meantime. We expect the intensity will turn back up after the election, whatever the outcome.
The recent correction in global equity markets hit the Nikkei hard, but the Abe Trade should have a lot more to go. After all, stocks started to rally last year even before Abe was elected, and they could do it again before the July elections. This could be a rewarding “buy low” opportunity for those who can ride out the volatility.
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Warren Hatch, PhD, CFA
Chief Investment Strategist
McAlinden Research - a division of Catalpa Capital Advisors, LLC