Japan’s political situation has taken a turn for the worse as a series of fresh scandals have surfaced. In March, Japan Prime Minister Shinzo Abe faced allegations of cronyism over the sale of state-owned land to a school operator. But in recent weeks, he has been accused of covering up a deployment of Japanese soldiers to Iraq from 2004 to 2006.
According to latest opinion polls by Japanese newspapers Mainichi and Yomiuri, approval ratings for the Abe administration have declined further to 30% (down from 31% in March) and 39%, respectively – mainly driven by a fresh series of scandals.
Citi analysts now place a slightly lower than 50% probability on Abe's survival in the coming months, with the Liberal Democratic Party (LDP) presidential election coming up in September.
Citi believes there could be no near-term impact on monetary policy, although fiscal policy may shift. If Ishiba or Kishida were to replace Abe, they would most likely implement the consumption tax hike as planned – in Citi’s view.
Nevertheless, Japanese equities are not expensive at 13x forward price to earnings (PE), which is a 13% discount to its 10 year average. However, a strong yen has historically been a headwind and this may temper the market’s upside in 2018. Investors can seek selective opportunities in sectors such as Robotics, Information Technology and Telecoms – in which Japanese firms are globally competitive.