So Japan has a new Prime Minister-Elect. And indeed, Shinzo Abe’s margin of victory, at least in a Japanese context, reeks of a potential mandate. Even if it is a vote against current policies and not necessarily a specific mandate, the difference in economic policy terms is so small that it is splitting hairs at best.
From a near-term policy standpoint, the implications are clear cut. An Abe government is expected to follow through on its pronounced economic policies of both further monetary and fiscal easing. More public spending and more quantitative easing—the high level of domestic-held government debt and central bank credibility be damned. Even if the newly-elected politicians have any doubts about the long-term efficacy of such moves, it seems to me they have boxed themselves into a situation where the question is not if they implement such policies, but instead it is simply their magnitude.
The implications for financial assets, at least in the near term, are equally clear cut. Given the current stock of government debt, even if it is domestically held, and the prospect of outright monetization of government debt, it does not bode well for the Japanese yen. Even if one believes that much of this has already been discounted in the currency crosses (the current exchange rate is about 84 yen to one U.S. dollar), very low yields and no prospect for any near-term recovery makes the yen a losing proposition. From a growth standpoint, there is a case to be made that near-term growth prospects are looking better even if the long-term growth prospects are still poor due to the structural issues facing an aging economy. If nothing else, the stimulus to the export sector alone should improve the near-term growth prospects. We believe that makes Japanese equities far more attractive than Japanese Government Bonds.
Note: Oppenheimer International Bond Fund, as of 11/30/12, had a 13.79% weighting in Japanese debt, which is below the 43.26% weighting Japanese debt that the fund’s benchmark, the Citi non-USD World Government Bond Index, had.