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Overview

Abenomics has taken the Japanese and world economy by storm in recent months. The plan was originally proposed before current Japanese Prime Minister Shinzō Abe returned to the Prime Minister role late last year. The plan includes a three-arrow approach to making Japan's economy more competitive as well as making the country more attractive for investment. The three-step plan seems to have worked so far, at least in the public markets as the Nikkei 225 is up by more than 39% YTD. Abe has received quite a significant amount of backlash from both opposition parties and from foreign countries for this plan. Many are concerned about the drastic move in the yen exchange rate as it can have very large implications for global trade. Compared with the U.S. dollar, the yen has weakened by over 15% YTD, which is a very large move for a currency. The combination of these two large moves this year have led investors to pile into the "Japan Trade," which consists of buying Japanese stocks while maintaining a short yen position. On April 28 of this year, I published an article titled, "Japan: Why The Yen Will Move Lower And The Nikkei Will Move Higher," which outlined the thesis for the investment. I own an ETF named the WisdomTree Japan Hedged Equity Fund (DXJ), which is an easy way for U.S. investors to gain exposure to this trend. The ETF has experienced tremendous amounts of fund inflows since Abenomics was announced. Abenomics will likely support the Japanese economy in the future and the upcoming elections are very important for the political landscape going forward.

^N225 Chart

^N225 data by YCharts

Elections On July 21

On July 21, Japan is holding elections for the House of Councillors, which is the country's upper legislative house. Shinzō Abe is the leader of Japan's Liberal Democratic Party and has been the country's PM since the end of last year. Also known as the LDP, Abe's party currently holds a large majority of the seats in Japan's lower House of Representatives. These seats have been held since the end of 2012 and the majority has helped Abe push through part of his political agenda. The party is gaining strong momentum in Japan and if the LDP is able to win a majority of seats in the upcoming election, the LDP would hold both houses and the position of PM, which would make it significantly easier for the party to push through legislation. It would be much easier for the party to implement the structural and fiscal reforms that are pivotal to the success of Abenomics. The economy is likely to benefit tremendously if these reforms are able to be implemented as they will attract investment and in conjunction with aggressive monetary policy will be able to bring Japan out of deflation and into strong economic growth over the long term.

Conclusion

The July 21 Japanese House of Representatives elections will be a catalyst for the Japanese markets and currency and if the LDP gains a majority, new fiscal reforms will likely also benefit the economy over the long term.

Source: Watch The July 21 Japanese Elections For A Hint On Abe's Power And Future Of The 'Japan Trade'