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Japanese Earnings Season: A Referendum On Abenomics?

James Dennin, Kapitall: Recently we wrote an article about Abenomics, the rationale behind Japanese Prime Minister Shinzo Abe's plan to reduce deflation and re-boot the long-stagnating Japanese economy. As most analysts were predicting, Abe's Liberal Democratic Party (LDP) won parliamentary elections in a landslide, indicating that the country is happy with the progress of his restorative initiatives.

[Read more from Kapitall: Earnings Update: 3 Healthcare Giants​]

However, an even more important referendum on Mr. Abe is set to transpire this week with the release of some of Japan's most important companies' Q2 earnings. Many important bellwethers of the Japanese economy, including the strength of its major automobile and electronics manufacturers, are expected to shed light on whether the Prime Minister's reforms have had a positive effect.  

Abe's program – a combination of inflation, public spending, and other measures designed to boost investment – came at a moment when Japan's growth was stalled, and GDP had sunk to its lowest rate since 1991. To make matters worse, when China passed Japan to become the world's second largest economy, many Nationalists began to worry that Japan's increasingly fragile economic state would jeopardize its ability to defend itself. Early indicators thus far have been good: consumer spending, the stock-market, and Abe's approval rating have all shot up.

Yet many are concerned about the nation's debt, which at 220% of GDP represents one of the highest government debt levels among the world's advanced economies. Some bears are even worried that measures put in place to galvanize the economy will in practice end up ruining it. 

Most of Japanese debt is borrowed from within the Japanese economy. This makes it far less risky than countries that borrow from other countries, such as Greece. However the Bank of Japan (BOJ) is also striving to hit 2% inflation targets, as a way to boost exports and make it easier to finance the country's debt. As some investors have pointed out, this could create a "rational investor paradox" wherein owners of BOJ bonds will be compelled to sell if the bank's measures prove successful because their bonds will become less valuable.

If growth is not strong, Abe is expected to delay an upcoming decision about raising the country's sales tax. Not simply an important step in lowering his nation's debt, Abe's resolve about the tax-hike is seen by many as an indicator of confidence in the Abe program as a whole. 

Toyota (TM), Honda (HMC), Sony (SNE), Panasonic (PC) are all releasing their earnings this week. Will they affirm or disprove optimism about Japan's growth? Use this list as a starting point for your own analysis.

The List

Analyze These Ideas: Access a performance overview for all stocks in the list.

 

Do you see investment opportunities in these Japanese companies? Use this list as a starting point for your own analysis.

1. Toyota Motor Corporation (TM): Engages in the design, manufacture, assembly, and sale of passenger cars, minivans, and commercial vehicles. Market cap at $190.43B, most recent closing price at $120.25.

 

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