(Bloomberg) -- Japanese stock investors should take note that the risks of domestic political upheaval or trade friction are far from gone away.
So say Nomura Holdings Inc. strategists led by Hisao Matsuura. While the trade rhetoric between U.S. President Donald Trump and China calmed last week, Nomura points to America’s upcoming midterm elections as a reason for worry: the Trump administration could introduce more protectionist measures to play to voters. The brokerage says it’s watching Prime Minister Shinzo Abe’s two-day summit with Trump in Florida starting Tuesday for signs on how this will develop.
“The situation is extremely fluid,” the strategists wrote in a note dated Friday. “Ahead of US midterm elections to be held in November, we cannot rule out the possibility of the U.S. government rolling out further measures to protect local industry.”
Nomura also pointed to falling approval ratings for Abe and his government in March, noting that political concerns could “erupt again.” Tens of thousands of people joined a demonstration outside Japan’s parliament Saturday, calling Abe a “liar” and seeking his resignation, in a sign of growing public anger over cronyism scandals engulfing Abe.
Abe’s cabinet approval rating fell to 31 percent, the lowest since he returned to power in 2012, according to an Asahi newspaper poll conducted April 14 and 15. Some people in politics and the market consider 30 percent to a be a key level for retaining power in Japan.
After a stellar 20 percent rally in 2017, the Topix index is down more than 4 percent this year amid Trump’s trade rhetoric, domestic political concerns and the strengthening yen . The Nikkei 225 Stock Average has lost about 4 percent.
Political Instability
“Political instability could be sparked once again in June when the regular Diet session ends,” the strategists wrote, referring to Japan’s parliament. “In the event of a change of prime minister, an LDP administration remaining at the helm would probably be seen as positive from the perspective of political stability, but might be seen as likely to open the door for existing monetary and fiscal policy to be revisited, and hence more of a negative for Japanese equities.”
Given these risks, it makes sense to focus on stocks with “Japan-specific” growth factors, Nomura says. It cites companies that benefit from domestic demand and are less hurt by yen appreciation, those likely to profit from the country’s population aging, and those related to the “Cool Japan” movement.