Abe’s third arrow just what Japan stocks need

Japan finally unveils long-awaited 'third arrow'
Japan finally unveils long-awaited 'third arrow'

Sentiment towards Japanese stocks should start to improve again now the government has started acting on its promise to deliver long-term economic reforms, analysts say.

Japan's government late Monday released a draft of Prime Minister Shinzo Abe's long-awaited growth strategy.

This included already-flagged policies such as a plan to cut the corporate tax rate and other steps like a promise to ease regulation in agriculture and allow more foreign workers to be employed in the housekeeping and nursing sectors.

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"I think the latest moves out of the Abe administration will be very important for sentiment, especially for global investors who had lost some faith in the reform efforts," said Charles Blankley, CIO at Gemmer Asset Management in San Francisco.

"I think that [sentiment] will clearly turn around in the second half of this year," he told CNBC Asia's "Squawk Box" Tuesday.

Japanese Prime Minister Shinzo Abe (C).
Stephane de Sakutin | AFP| Getty Images

Japan's blue-chip Nikkei stock index soared some 57 percent last year amid massive monetary stimulus from the Bank of Japan and optimism that Abe's economic agenda would revive an economy plagued by almost two decades of deflation and lackluster growth.

The Nikkei's rally, however, stalled this year with investors keen to see Abe deliver on the long-term structural reforms that many economists argue are essential to turning things around for the world's number three economy.

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The stock market is down about 8.3 percent this year, lagging a gain of almost 5 percent in the S&P 500 and a rise of about 5.5 percent in the FTSEurofirst 300, a broad index of European shares.

Analysts say plans to cut corporate tax and request the state pension fund to shift more of its asset allocation towards equities should boost sentiment towards Japanese shares.

"Turning the third arrow into reality is important," said Ben Collett, head of Asian equities at Sunrise Brokers in Hong Kong. "The restructuring of corporate tax is something that we want to see and it does make sense."

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Japan has a corporate tax rate of around 35 percent, one of the highest rates in the developed world. Regional neighbor Australia has a tax rate of about 30 percent for businesses, while in financial hubs Singapore and Hong Kong the levels are roughly 17 percent.

In the draft economic plan presented to the Industrial Competitiveness Council on Monday, the government said it will lower the tax rate to below 30 percent with a few years starting in the 2015 fiscal year.

Nikkei six-month chart

Gemmer Asset Management's Blankley said that his firm was turning more positive on Japanese shares.

"We were neutral because we weren't seeing the structural changes we had hoped for," he said. "Now I think we are getting that and that will lead us to add to our position."

Collett at Sunrise Brokers added a note of caution, saying getting reforms through Japan's parliament could be lengthy.

Last week, for instance, a Japanese politician submitted demands to the ruling Liberal Democratic Party who are proposing a bill to legalize casino gambling – pushing back a long-awaited parliamentary debate on the bill to this week.

"Our belief is that they [lawmakers] will make the right choices. But this is Japan, so you have to be patient," Collett said.