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‘End of an era’ as Japanese Prime Minister Shinzo Abe resigns

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Japan’s longest-serving Prime Minister, Shinzo Abe, has resigned due to ill health, but leaves the legacy of his flagship ‘Abenomics’ program of reform.

Abe took up the helm in 2012 and after eight years and a chronic illness, has stepped down from the position, stating that he didn’t want his declining health to impact important future decisions.

He will be best remembered for his aggressive economic policy of reform, coined ‘Abenomics’, consisting of three pillars: monetary easing, fiscal stimulus and structural reforms to improve companies’ corporate governance.

Following the news of Abe’s departure, Japanese equity markets were down, the Japanese Government Bond (JGB) curve steepened and the Yen was up slightly.

For Eva Sun-Wai, junior fund manager at M&G Investments, Abe’s departure shouldn’t be seen “as a giant wobble” as his ill health has been a topic of conversation for a while.

“It’s more sensible that he steps down on his own terms rather than as part of some unexpected political shake-up,” she said.

Sun-Wai added: “This is a good entry point rather than reason to worry – the JGB curve has been steep for some time now and the Bank Of Japan is unlikely to tolerate a sharp deviation from their yield targets for too long. They have also vowed to retain their current pace of bond purchases in September. Japanese large cap stocks have some of the strongest balance sheets globally so we don’t expect equity markets to massively destabilise in the mid-term.”

However, she said investors can expect higher volatility for a while as Japan goes through this transition phase, but we’re unlikely to see giant moves in its monetary stance going forward.

“When they embarked on their ambitious monetary easing and regulatory reform a couple of decades ago (eventually labelled ‘Abenomics’), they positioned themselves as one of the few low-rate markets and a region of stability during risk-off periods. Now, with global rates having fallen in line with Japan (‘Japanification’), there isn’t much reason for them to drastically shake up monetary or fiscal policies (especially in regard to JGB curve control),” she added.

Archibald Ciganer, portfolio manager of the T. Rowe Price Japanese Equity fund, said his successor will most likely come from his closer allies within the LDP party and will continue to move forward with the broad principles of constructive politics.

Ciganer said: “The case for Japanese equities is positive, especially as we continue down a path of improvement from a structural and global economic dimension. With corporate Japan evidencing little to no net debt, and with corporate governance continuing to improve – even as profits have been pressured – Japan provides a very different set of characteristics to US equities, which have led the strong equity market rally in recent months.

“As we look forward to the next stage of the equity cycle and the next evolution of domestic and international political governance, we continue to feel Japan is a compelling active management case, given its positive change dynamics and the fact it is under-owned.”

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