Joji Maki examines the results of Sunday's Japanese election, which returned PM Junichiro Koizumi and his Liberal Democratic Party (LDP) to power.
BAM believes that the prospects for the Japanese economy are better than they have been for years, and restored confidence will see a boost in investment in Japanese equities.
Joji Maki, Head of Japanese equities at Baring Asset Management says: "We
anticipated victory for Koizumi, but the number of seats won by the coalition pleasantly surprised us. This makes it highly likely that the postal reform bill will be passed in the upper house, and gives the prime minister a broad mandate to make progress on other reforms. It's an outstanding result for investors in the Japanese market, and we expect sentiment to improve rapidly from here."
However, it is not all cut and dry for potential investors in Japanese equities.
Maki warns that there might be a pull-back in the short term after the strong recent performance of the market.
Maki observes: "Many investors had started to anticipate a victory, and we could well see some profit-taking in the coming weeks from short-term investors. However, this should be viewed as an opportunity for anyone looking to increase exposure to Japan. Month by month, the fundamentals continue to improve, with corporate profits rising, deflationary pressures easing and with a reform-minded government newly returned to power, the prospects for the Japanese economy and market are better than they have been for years."
"So far, it has mainly been foreign investors allocating to Japan", adds Maki. "The big turning point for the market will be when domestic confidence improves to the point where domestic investors buy the Japanese equity market again. There's a wall of money waiting to be invested, and when it is unleashed, the effect on the market could be dramatic. Koizumi's return to power undoubtedly brings that point closer. All eyes are on Japan again, and we will be watching the investment data very closely in the coming months."
In the election, the LDP won 296 of the 480 seats in the parliament's lower house, up from 249 seats before parliament was dissolved on 8th August. By contrast, the main opposition group, the Democratic Party of Japan, won just 113 seats, down from 175 in the last parliament.
Add in the additional 31 seats won by LDP allies the New Komeito Party, and the ruling coalition now has a two-thirds majority in the lower house, enough to override votes in the upper house, the chamber that rejected Koizumi's post-office privatisation bill in August and triggered the snap election.
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