Was Abenomics a Failure?
- Reflection on the past decade froma value investor’s perspective
Yoshihiro Miyazaki
Chief Portfolio ManagerMitsunari KawanoSenior Portfolio ManagerNomura Asset Management Co., Ltd.
Published August, 2023
After more than a decade since its introduction, the revitalization policy enacted by former
Prime Minister Shinzo Abe, or Abenomics, has often been criticized for its apparent lack ofsignificant positive impact on corporate Japan and the domestic economy. Chief Portfolio
Manager Miyazaki Yoshihiro and Senior Portfolio Manager Mitsunari Kawano of the JapanStrategic Value Equity Team offer their insight into the actual impact of Abenomics. We also
forecast the potential constructive outcomes of the policy if it is maintained by the Kishida
Administration, assuming corporate Japan continues to improve governance and earnings.

Main points:■ Abenomics was not a failure and, in fact, is closer to success after a decade.
■ Abenomics improved the business environment for Japanese companies, leading to anincrease in their earnings (or earnings per share, EPS).
■ However, while Japanese companies' balance sheets have improved, and return onequity (ROE) has reached 10%, it is not at a notable level compared to other countries.
When focusing on this point, Abenomics may be viewed as a "failure", and investors'
overall evaluation of Japanese equities has not been sufficiently high.
■ Japanese companies are expected to make further efforts to improve their balance
sheets, and ROE will likely improve through measures to increase in total shareholder
returns, including dividend payout ratio.

Abenomics – Looking back its implementation since late 2012
Shortly after former Prime Minister Shinzo Abeleft the cabinet office in September 2020, there

Figure 1. Employed Persons – Japan(persons, mn)

was a litany of criticism that Abenomics was a69

failure. However, looking back at the preceding68

decade, these scathing critiques may not be
entirely accurate.
The pillar of Abenomics’ plan to achieve

67
66

economic growth was the "Three Arrows" of65

monetary easing, fiscal stimulus, and growth64

strategy. Several numerical targets werespecifically set, such as a consumer pricegrowth rate of 2%, a real GDP growth rate of2%, and a nominal GDP of 600 trillion yen.
None of these targets had been achieved byAbe Administration(Liberal Democratic Party)

63620002040608

10121416182022(Yr)Source: Nomura Asset Management based on Statistics Bureau ofMinistry of Internal Affairs and Communications

the time Abe left office.
However, as shown on the right, the number ofemployed persons increased significantly and theconsumer price index emerged from the so-called
deflationary situation during Abe’s Administration,
undoubtedly changing the Japanese economy’sFigure 2. Consumer Price Index – Japan(YoY, %)543

course away from the stagnation that persisted

2prior to Abenomics. In addition, the consumer

1

price inflation rate (excluding fresh food) has now

0exceeded 2% for more than one year, and-1

nominal GDP was 590 trillion yen in the April-June-2

period of 2023, just shy of the Abenomics target.

-3

Considering the intensification of U.S.-China
friction and the outbreak of COVID-19, it can be

CPI (excluding food andenergy)

Abe Administration(Liberal Democratic Party)*Excluding consumption tax

00

02040608

10121416182022(Yr)Source: Nomura Asset Management based on Statistics Bureau ofMinistry of Internal Affairs and Communications

said that the numerical targets of Abenomics arebeing achieved, though slower than initiallyexpected, in the post-Abe era.

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Looking back on the last 10 years from an investor's perspective
From an investor's perspective, let's see how
stock prices have fared since Abenomics’
inception in 2012. Figure 3 shows that theFigure 3. Stock market returns (local currencybased)(End of 2012 to June 2023)

S&P500 had the highest return, while TOPIX400

was second highest. Until around 2018,

350

TOPIX had the highest return compared tostock indexes in Europe and the US.

SP500 USD
TPX LCFTSE Eurofirst 300 LC

300

SSE A Share LC250

However, if we look at the return of the stock

200

marketby150

international investors in US dollar terms, we100

ofeachcountry,

as

seen

can see that the TOPIX has the same returnas the indexes of Europe and China, and does
not stand out compared with them. This might
be a significantly influential factor behind
global investors viewing Abenomics as a500

Dec-12

Jun-14

Dec-15Jun-17

Dec-18Jun-20Dec-21

Jun-23

Source: Nomura Asset Management based on FACTSET datafailure.

Figure 4. Stock market returns (US dollar based)(End of 2012 to June 2023)

This is, of course, due to Yen weakness.

400350300

SP500 USDTPX USDFTSE Eurofirst 300 USD
SSE A Share USD

250
200
150
100
500

Dec-12

Jun-14

Dec-15Jun-17

Dec-18Jun-20Dec-21

Jun-23

Source: Nomura Asset Management based on FACTSET data

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Abenomics has improved the business environment
From a stock market perspective, the growth strategy that represents the third arrow in Abenomics
seems to be underappreciated. However, to properly evaluate the third arrow, it is important toexamine how the business environment surrounding Japanese companies has changed.
Before the start of Abenomics, it was said that the competitiveness of Japanese companies wasbeing hindered by the “six-fold pain” of the super-strong yen, delays in economic partnershipagreements, high corporate tax rates, strict labor regulations, strict environmental regulations, andpower shortages/high electricity costs.
Figure 5. Present and future of the "six-fold pain" faced by Abenomics
Six Struggles of Significant Weakness

Current

Hereafter

1

Appreciation of the Yen

75-80 yen in the latter half of 2011

The yen's appreciation will be resolved, andthe cost of the yen's depreciation will berealized?

2

Delay in economic partnershipagreement (EPA)

Nearly 20% of exports and imports as ofDecember 2011 (Economic Partnership
Agreement with ASEAN, India and 3 othercountries entered into force)TPP11, Japan-EU EPA, Japan-US trade
agreement, Japan-UK EPA, RCEP, etc.,
come into force, about 80% of exports andimports

Aiming to implement "DFFT" to promote
free data circulation with internationalreliability

3High corporate tax rates

37.00% in FY 201229.74%

4 - 4.5% increase at an appropriate timeafter 2024 (proposed tax increase due todrastic strengthening of defensecapabilities)

4Strict labor regulations

Inflows into and out of the unemployment
pool 0.78% (2010)

Inflow and outflow of the unemployment
pool 0.82% (2020), lower than in othercountries

Trinity of Labour Market Reform (Support forcapacity building through reskilling,introduction of job pay, and facilitation oflabor mobility to growth areas)

5

Strict environmental regulation

6

Power shortage andhigh electricity costs

14.33 yen/kWh(For industry: FY 2010)19.28 yen/kWh(FY 2021 for Industry)

Energy-saving promotion, mainstay power
supply of renewable energy, utilization of
nuclear power (concrete construction ofnext-generation innovative reactors)

New challenges: Delayed digitization

The "Realization of the World's Highest IT
Society" slogan in the Japan RevitalizationStrategy 2013

IT delays more clearly under the pandemic

Accelerating DX and creating a Digital
Garden City

Reduce greenhouse gas emissions by 15% Reduce greenhouse gas emissions by 46%
from 2005 levels by 2020 (as of 2009)
from FY 2013 levels by FY 2030

As a new source of growth (¥150 trillion inpublic and private GX investment over 10years)

Nomura Asset Management based on Annual Report on the Japanese Economy and Public Finance 2021(White Paper), the Cabinet Office, andthe Ministry of Health, Labor and Welfare data

Let us review what happened to these factors. First of all, the super-strong yen has reversed due toaccommodative monetary easing, which was the first arrow of Abenomics. Second, many of theeconomic partnership agreements that experienced delays have been signed and come into force.
For example, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership(“CPTPP” or “TPP11”) was signed in March 2018, the Japan-EU Economic Partnership Agreement
was signed in July 2018, and the Japan-US Trade Agreement came into force in October 2018.
These agreements have had a cumulative effect of increasing the overall exports and imports
coverage ratio to approximately 80%. Finally, the high corporate tax rate has been gradually reduced
to 29.74%, the same level as in Germany.

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Whilestrictlaborregulations,strict

environmental regulations, and electricity
shortages/high electricity costs continue tobe points of pain, the other three show clear
indications of improvements made during theFigure 6. TOIPX and S&P500 EPS Comparison(FY12 = 100)350

Abenomics era.

250

In addition, the Corporate Governance Code200

and the Stewardship Code were introduced

150

during the Abe Administration. As a result,100

since 2012, the earnings per share (EPS) ofTOPIX has grown faster than that of theS&P500

500S&P500.

TOPIX300

FY12FY14

FY16FY18FY20FY22FY24e

Source: Nomura Asset Management Based on FACTSET Data

A balance sheet perspective on investors’ cautious view of Japanese stocks
As

described

above,

Abenomics

has

improved half of the "six-fold pain" ofJapanese companies, resulting in TOPIXEPS growth exceeding that of the S&P500

Figure 7. Balance Sheet of TOIPX All Listed
Companies (excluding Financials and Japan Post)(FY11 = 100)250%

since 2012. However, TOPIX has failed tooutperform the S&P500 in returns. In otherwords, the valuation of Japanese stocks did
not increase.
Our key findings of the data from 201150%

Cash and Deposits
Net Assets
Total Assets
ROE (RHS)

200%

45%
40%
35%

150%

30%
25%

100%

20%

onwards are as follows:••

Net profit growth was 421%.
However, net assets also increased
by about 2 times to 206%, so the ROE
only improved by 2.0 times.

•15%
50%

10%
5%0%

FY11

FY13

FY15

FY17

FY19

FY210%

Source: Nomura Asset Management Based on FACTSET Data

Total assets have not quite doubled to 186%, while net assets have increased to more than
206% and cash and deposits to 234%.

•Interest-bearing debt increased less than total assets to 177%.

•As a result, the capital adequacy ratio improved from 38.6% in 2011 to 43.0% in 2022.

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Overall, the net income of Japanese companies improved significantly, but at the same time, cashand deposits piled up and balance sheets improved, which shows that the improvement in ROE washeld back. So there is clear evidence of progress, but further change is needed.
In March 2023, the Tokyo Stock Exchange put new pressure on its listed companies to not only
increase profits but also to pay attention to their balance sheets, by requesting companies with a sub
1x price to book ratio (PBR) to disclose and implement improvement measures. After a number ofdiscussions with corporate executives, we view that they are gaining a deeper understanding,
supported in part by the Tokyo Stock Exchange’s measures, that return on equity (ROE) will
deteriorate if profits increase and capital simply accumulates. Moving forward, we believe thatJapanese companies will be highly committed to improving their balance sheet management andimproving their corporate value by improving their payout ratio.
As such, we believe that the outlook for Japan as a whole is extremely encouraging. There havebeen good flows from international clients into Japan this year, but the current market conditions
coupled with the positive future that we have outlined above, means that there is a very attractive
entry point into the Japan market right now.

DISCLAIMER
This report was prepared by Nomura Asset Management Co., Ltd. (“Nomura Asset Management” or “NAM”) for
information purposes only. Although this report is based upon sources we believe to be reliable, we do not guarantee its
accuracy or completeness. Unless otherwise stated, all statements, figures, graphs and other information included in thisreport are as of the date of this report and are subject to change without notice. The contents of this report are notintended in any way to indicate or guarantee future investment results. Further, this report is not intended as a solicitation
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