After Abe, more Abenomics — for better or worse

The "three arrows" playbook of aggressive monetary easing, fiscal spending and structural reform that outgoing Prime Minister Shinzo Abe deployed to revive Japan's economy scored few bull's-eyes over his administration's record run since late 2012, but investors are hoping his successor picks up the quiver and runs with it.

Investors, especially foreign investors, were unnerved by Mr. Abe's surprise announcement on Aug. 28 that he will step down for health reasons, in part because the prime minister has been so closely identified with the "Abenomics" policy mix he came to power touting, wrote Masaki Taketsume, a Tokyo-based fund manager with Schroder Investment Management (Japan) Ltd., in a market commentary.

But as Mr. Abe heads to the exit, awaiting a Sept. 14 ruling party vote to anoint a successor, analysts say the latest signs all point to continuity.

Of the five or six ruling Liberal Democratic Party chieftains expected to vie for the top spot, Yoshihide Suga — the chief cabinet secretary who served as Mr. Abe's right-hand man throughout his eight-year run — looks to come out on top, a reassuring choice from a policy standpoint, said John Vail, Tokyo-based chief global strategist with Nikko Asset Management.

Institutional investors drawn to Japan's market on the strength of policies Mr. Abe set in motion say they see no reason to expect the upcoming leadership rotation to result in any material changes to the outlook for Tokyo-listed stocks.

David J. Holmgren, chief investment officer of Hartford, Conn.-based Hartford HealthCare's $3.3 billion in endowment and pension assets, said his team closely tracked the rumors about Mr. Abe's health that began circulating in late August and concluded there will be "a continuation of policies, which should keep our thesis for Japan intact."

That thesis — which led Mr. Holmgren to move from an underweight position in Japanese equities to an aggressive overweight for Hartford HealthCare's portfolio in 2017 — held that the Abe administration's push for corporate governance and stewardship reforms was setting the stage for greater value creation by Japanese companies.

And if Warren Buffett made waves last month by confirming he had plowed $6 billion into Japan's top five trading houses to acquire a 5% stake in each, analysts say a broader recognition of the value on tap now in Japan's stock market could emerge when the country turns the corner in addressing the impact of the coronavirus on the Japanese economy.

Japan's relative success in dealing with the virus so far hasn't been reflected in share prices, Schroder's Mr. Taketsume noted. With the strength of Japanese corporate balance sheets now emerging as a competitive advantage, once uncertainty about the medium-term outlook diminishes Schroders is "reasonably confident about buying into distressed earnings and low valuations in Japan," he wrote.

Even as investors and analysts welcome the prospect of policy continuity, opinions remain all over the map regarding how effective Abenomics has been in reviving an economy beset by deflationary pressures and a rapidly aging demographic profile when Mr. Abe took the helm.

Some analysts — noting that Abenomics never came close to hitting the targets it set for itself — see the glass as half empty or worse.

Despite record deficit spending and quantitative easing, the Abe government only achieved its 2% annual economic growth target twice in eight years and its 2% inflation target once, noted Craig Mark, a professor of international studies at Tokyo-based Kyoritsu Women's University.

Mr. Abe was far more successful at "sloganeering" and "political marketing" than he was at managing the economy, especially when it comes to "third arrow" structural reforms, agreed Aurelia George Mulgan, professor, School of Humanities and Social Sciences, with Canberra-based University of New South Wales.

In contrast, a number of analysts insist Mr. Abe has earned a place of distinction among Japanese leaders over the 30 years since the country suffered through the bursting of its bubble economy. The Tokyo market's Nikkei 225 stock benchmark hit an all-time high of 38,957.44 on Dec. 29, 1989 which remains more than 15,000 points above its latest close.

Mr. Abe "was absolutely essential to providing Japan with political stability and policies that re-established the country's world standing and allowed it to exit an era of pessimism and low-growth orientation," Mr. Vail said.

A research note issued by Morgan Stanley struck a similar tone, saying Mr. Abe leaves a legacy "in economic policy and corporate reform which is similar in scale to that of the transformational leaders of the 1980s — Ronald Reagan and Margaret Thatcher — and equally unlikely to be reversed."

If so — and in contrast to his five predecessors whose administrations, on average, lasted little more than a year — that was partly because he was given the time needed to make a mark.

"One of Abe's achievements was staying in office that long," noted Stephen Schwartz, Hong Kong-based senior director and head of Asia-Pacific sovereign ratings with Fitch (Hong Kong) Ltd. But how he used that time and his political capital were key as well, Mr. Schwartz said, citing by way of example the prime minister's success in breaking a stalemate that had kept the Bank of Japan and the Finance Ministry from cooperating on powerful economic stimulus policies.

Mr. Abe's first arrow — aggressive monetary policy — has been widely seen as the most potent of the prime minister's three-pronged approach to revitalizing Japan's economy, while the third arrow of structural reform has often been dismissed as inconsequential. "But I'm not sure I would subscribe to that view," said Mr. Schwartz, pointing to the administration's success in expanding participation in the workforce by women and older workers as one of several significant structural reforms during the prime minister's tenure.

Tomo Kinoshita, global market strategist, Japan, at Invesco Asset Management (Japan) Ltd., likewise said that Mr. Abe's push to overcome bureaucratic hurdles by setting up committees to pursue structural reforms while amassing more influence in making high-level ministry appointments paved the way for changes that promoted economic growth. Progress was made in areas such as tourism — where arrivals to Japan quadrupled over the eight-year span of Mr. Abe's rule — corporate governance and work life in Japan, including creating more nursery schools to facilitate the entry of women to the workforce, he said.

Some market participants, while conceding that Mr. Abe's record has been mixed, say most observers are hard pressed to identify a stronger star to hitch their wagons to.

Mr. Abe has "probably fallen short of what he sold both to his constituents (at home) as well as markets overseas, but what he did achieve was much more than would have been the case if someone else were in power," said Cameron Systermans, Tokyo-based head of mainstream investments, Japan, with Mercer Investments (Japan) Ltd.'s outsourced CIO business.

The broad interest now in policy continuity, despite that mixed record, reflects the fact that either "no one else sees a better way" or "nobody else who has a strong alternative thesis has the support or the numbers to make it happen," Mr. Systermans said.

Invesco's Mr. Kinoshita said overseas investors that invested in Japanese equities in recent years have told him that one attraction was the Abe administration's willingness to pursue reforms. On that score, comments made this week by Mr. Suga pointing to the need for consolidation of regional banks in Japan and more competition among mobile phone operators could be seen as a promising sign that, even with the immediate need to address the coronavirus crisis, reform remains on the government's agenda, he said.

Whether Mr. Abe's successor will be granted the kind of tenure the departing prime minister enjoyed to focus on policy outcomes remains uncertain. The next general election must be held in September 2021, raising the prospect that whichever candidate grabs the crown this month might opt to call a snap election to win more time to pursue difficult decisions, analysts say.