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Abe’s ‘Third Arrow’ to Benefit Investors in Japanese Equity

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Nov. 20 2020, Updated 4:59 p.m. ET

Time for the third arrow in Japan

While quantitative easing measures in Japan are doing their part to make Japanese equity attractive to investors, the implementation of Prime Minister Shinzo Abe’s third arrow of Abenomics should go a long way to boost corporate profitability and, consequently, Japanese equity.

Abenomics is a three-pronged approach that Abe likes to refer to as his “three arrows.” These include fiscal stimulus, monetary easing, and structural reforms. We’ve already seen Japanese equity surging under the benefit of the first two arrows of Abenomics that are already in effect:

  1. huge fiscal stimulus
  2. dramatic program of monetary easing

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Japanese equity has been a clear outperformer

Since Abe took over in 2012, the Japanese stock market has surged, outperforming all major developed markets (EFA). See Japan Outperforms Markets So Far this Year for more background.

Japanese stocks are up more than 60% (in local currency) since late 2012. The iShares MSCI Japan ETF (EWJ) rose about 11.2% on a YTD (year-to-date) basis. The WisdomTree Japan Hedged Equity ETF (DXJ) has returned 10.2% in the same period. Corporate stocks Sony (SNE), Mitsubishi UFJ Financial Group (MTU), and Honda Motor (HMC) have risen more than 40%, 18%, and 14%, respectively, YTD.

Abe’s core objective is to pull the world’s third-largest economy out of two decades of stagnation by expanding Japan’s money supply, freeing up regulations, and encouraging the yen to fall. Abe believes it’s time to shoot his third arrow: structural reforms.

We’ve highlighted the three key reasons why now is the right time for the implementation of structural reforms in our analysis Why Now Could Be the Right Time for Structural Reforms in Japan.

Japan is in the process of a major shift in corporate behavior toward being more shareholder-friendly. This should also serve to boost Japanese equity, as we’ll see in the next part of this series.

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