Only three days remain until Japan’s parliamentary elections, and reports indicate that Prime Minister Shinzo Abe’s ruling coalition is likely to win a majority of the upper house on July 21st. Reuters, citing a Kyodo News poll, writes that Abe’s Liberal Democratic Party (LDP) and its coalition partner, the New Komeito, are poised to win more than 70 seats. If the coalition does emerge victorious on Sunday, it will mark the first time that a single party has held a majority in both houses of the Japanese parliament in 20 years.
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An LDP majority in the two chambers could give Mr. Abe the mandate he needs to expand his anti-deflation economic stimulus plan. Last month, Mr. Abe revealed the “third arrow” of his economic reforms, which focuses on deregulation and tax reduction. Some of the measures outlined in the “third arrow” include cutting corporate taxes, lowering taxes on investments, and establishing strategic economic zones to attract foreign businesses and increase private investment. With the LDP holding a majority in both houses, Mr. Abe could have an easier time realizing the goals of the "third arrow". Furthermore, as the Wall Street Journal notes, the LDP presence largely protects Mr. Abe from ouster bids, increasing his odds of staying in power for the remainder of his three-year term.
While the success of Abenomics – a name widely used to describe Mr. Abe’s economic policy – remains to be seen, Mr. Abe’s efforts have received tepid support from the International Money Fund (IMF). The fund complimented the start to Mr. Abe’s ambitious economic recovery back in May, specifically commending the efficacy of the new anti-deflation measures. And in last week’s update to the World Economic Outlook, the IMF raised its 2013 growth forecast for Japan from 1.5% to 2.0%, stating that the “stronger forecast for 2013 than previously projected reflects the effects of recent accommodative policies on confidence and private demand."
However, debt remains a huge issue for Japan, one which the IMF also noted in its May report. Bloomberg writes that according to figures from the fund, Japan’s public debt could swell up to 245% of its GDP this year, eclipsing Greece’s 179% and making Japan the global leader in public debt. The IMF writes that “structural fiscal consolidation of 11 percent of GDP is needed to put the debt-to-GDP ratio firmly on a declining path” and considers an increase in the consumption tax imperative to alleviate the country’s debt. Mr. Abe, however, is waiting to see the strength of the economy in the second quarter before raising the 5% consumption tax next year.
Investing IdeasMr. Abe's "third arrow" plan contains several business-friendly initiatives, but the proposed reforms have yet to be enacted. Keeping in mind the potential benefits of Mr. Abe's suggested measures, the following list focuses on the profitability of Japanese companies, which would conceivably be augmented if the "third arrow" plan were successfuly implemented.
The list consists of Japanese stocks with increasing profitability as indicated by rising diluted normalized earnings per share (EPS) for the past three consecutive years. EPS refers to the amount of profit allocated per outstanding share of common stock. Diluted normalized EPS differs from normalized EPS by taking convertible securities into consideration. Examples of convertible securities include options, warrens, and convertible preferred shares that could be exercised as well as lower net income. As a result, diluted normalized EPS tends to be both lower and more conservative than normalized EPS.The List Your browser does not support iframes. Do you think these companies will continue to increase their profits? Use this list as a starting point for your own analysis. 1. Wacoal Holdings Corp. ( WACLY): Designs, manufactures, and markets women's intimate apparel primarily in Japan, Asia, the Americas, and Europe. Market cap at $1.48B, most recent closing price at $52.22. Diluted normalized EPS increased from 26.97 to 31.68 during the first time interval (12 months ending 2011-03-31 vs. 12 months ending 2010-03-31). For the second time interval, diluted normalized EPS increased from 31.68 to 52.5 (12 months ending 2012-03-31 vs. 12 months ending 2011-03-31). And for the last time interval, the EPS increased from 52.5 to 68.76 (12 months ending 2013-03-31 vs. 12 months ending 2012-03-31). 2. ORIX Corp. ( IX): Provides financial products and services to corporate and retail customers in Japan and internationally. Market cap at $16.7B, most recent closing price at $74.23. Diluted normalized EPS increased from 41.13 to 69.99 during the first time interval (12 months ending 2011-03-31 vs. 12 months ending 2010-03-31). For the second time interval, diluted normalized EPS increased from 69.99 to 80.76 (12 months ending 2012-03-31 vs. 12 months ending 2011-03-31). And for the last time interval, the EPS increased from 80.76 to 109.52 (12 months ending 2013-03-31 vs. 12 months ending 2012-03-31).
3. Kubota Corporation ( KUBTY): Engages in the manufacture of machinery, and other industrial and consumer products primarily in Japan. Market cap at $20.63B, most recent closing price at $82.12.
Diluted normalized EPS increased from 33.35 to 44.02 during the first time interval (12 months ending 2011-03-31 vs. 12 months ending 2010-03-31). For the second time interval, diluted normalized EPS increased from 44.02 to 50.05 (12 months ending 2012-03-31 vs. 12 months ending 2011-03-31). And for the last time interval, the EPS increased from 50.05 to 58.86 (12 months ending 2013-03-31 vs. 12 months ending 2012-03-31).