In the political sphere, the sun has set on the 54-year reign of the Liberal Democratic Party. On 30 August, the DPJ (Democratic Party of Japan) won a landslide victory in the country’s general election, taking 308 of the 480 seats in the lower house of the Japanese Diet. Nearly 70 per cent of the eligible population voted, making it the highest turnout for an election in decades.
In some ways, the sweeping away of Japan’s political old guard is analogous to the changes that have transformed the Japanese corporate world in recent years. Companies that formerly served the vested interests of their senior executives now focus on shareholder returns. And, over the past decade, Japan’s notoriously inflexible labour market has been shaken up, with the culture of full-time ‘jobs for life’ giving way to a new era of flexible, part-time working.
1yr performance...
...But, 10yr performance
Given, however, that Japanese funds haven’t been a hot asset class since the later part of the twentieth century, why should investors pay any attention to any of these changes?
Japan remains the second-largest economy in the world. The Japanese stockmarket (again, the world’s second-largest) is home to globally dominant companies such as Toyota, Sony, Canon, Bridgestone and Nintendo. Not only does the DPJ’s victory draw a line under fifty years of almost uninterrupted LDP rule, it also heralds a new economic era for this industrial and financial superpower.
More importantly, perhaps, the DPJ promises to pursue pro-growth policies. Their main aim is to increase the disposable income of Japanese households and thereby encourage consumption. In pursuit of these goals, they will abolish road tolls, scrap petrol taxes and increase childcare allowances.
It is the last of these measures that could prove to be of greatest long-term significance. In theory, it should encourage the birth rate to rise, thereby addressing Japan’s single biggest problem: its rapidly ageing population. If persuading the Japanese populace to reproduce proves to be the DPJ’s only achievement, then the long wait for new leadership will have been worthwhile.
Recent history suggests that political events can have a big impact on the Japanese market. The DPJ’s victory represented the most significant political development in Japan since 2005, when the electorate resoundingly endorsed Junichiro Koizumi’s reformist programme. In the wake of Mr Koizumi’s landslide victory, the Topix rallied sharply, climbing by 59 percent in just eleven months.
The DPJ’s victory is, we believe, more significant than many western investors have realised: there may, at long last, be a new dawn in the land of the rising sun.
Keith Donaldson is the manager of the Martin Currie Japan Alpha Fund . The views expressed here are his own.