​Junichi Inoue, Janus Henderson Head of Japanese Equities, provides his team’s views on Prime Minister Shinzo Abe’s recent announcement of a snap election and its potential implications for Japanese investors.

The recent calling of a snap election in October by Japanese Prime Minister Shinzo Abe appears to be a tactical move to shore up political support to extend his term in office. According to recent polls, Abe has traditionally enjoyed a support ratio of around 50%, but this fell to around 30% during July and August this year. This weakened position followed the Kake Gakuen scandal, which revolved around allegations that the prime minister had displayed favouritism and intervened to help a veterinary school win approval for construction in a special economic zone.

Since the scandal came to light, Abe’s Liberal Democratic Party (LDP) has lost more than half its seats in the Tokyo Metropolitan Assembly, displaced by a new political party led by Tokyo governor Yuriko Koike. Within the LDP, there was even talk of replacing the party leadership. However, September has seen support for Shinzo Abe return due to intensifying geopolitical risk from North Korea as well as a series of scandals within the opposition party.

Potential election outcome

We think the main opposition party, the Democratic Party of Japan, has little chance of winning, while other opponents are not well positioned given that the election came as a surprise. A potential outcome could be the LDP and its coalition partner taking more than half of the votes, but below two thirds of the Lower House seats.

Market implications

A successful extension of Abe’s term could be very positive for Japanese equities. The prime minister has made it clear that while consumption tax will be raised, the proceeds will be reinvested into education rather than pay down government debt.

In our view, ‘Abenomics’ (policies implemented by Shinzo Abe including the ‘three arrows’ of monetary easing, fiscal stimulus and structural reforms) has so far been a success. Since its implementation in December 2012, the unemployment rate has declined from 4.3% to 2.8% in July. Meanwhile, companies’ return-on-equity, corporate governance and dividend payouts have improved significantly; while share buybacks have become a common way to reward shareholders. We maintain a positive outlook on Japanese equities and continue to see significant value in the asset class as valuations generally remain attractive on both an absolute and historical basis.