A recent research trip confirmed our longstanding view that Japan’s political environment remains relatively stable, despite Prime Minister Shinzō Abe’s vulnerability, which began to emerge this summer.

First, there were scandals—allegations of favors given to two school operators linked to Abe. Abe denied involvement, but polls showed voters doubted his explanations.

Then, in a stinging rebuke, Abe’s ruling Liberal Democratic Party (LDP) lost seats to the novice Tokyo Citizens First party and its allies in the election for the 127-member Tokyo Metropolitan assembly. Tokyo Citizens First took 79 seats versus just 23 for the Liberal Democratic Party.

As a result, many followers of the situation thought Abe might be on his way out. While he still might be, we think two things continue to work to his advantage: a pickup in growth and the situation in North Korea.

In regard to growth, the International Monetary Fund has raised its forecast for Japan’s economy, saying it now expects it to post gross domestic product (GDP) growth of 1.5% in 2017 and 0.7% in 2018, both up from prior projections.

In regard to North Korea, as Pyongyang steps up missile tests amid a deepening regional crisis, Abe has spoken out in favor of securing a stronger mandate to respond to the threat. This resulted in stronger showings in opinion polls for Abe, who took advantage of the situation and called a Lower House snap election, which saw the LDP and Komeito coalition retain a rare super majority.

These dynamics affirm the potential that Abe could serve another term and become the longest-serving PM in Japanese history.  In the past, Japan has cycled leaders in and out of office fairly quickly and, officially, Abe’s second term expires in 2018. But the Liberal Democratic Party has revised its party rules to extend the presidential term limit from two to three, giving Abe a strong chance at being selected for a third term next September.

And Abe will likely continue to push for reform. Over the years, we’ve talked about the three arrows of Abenomics—monetary easing, fiscal stimulus, and structural reforms. The first two have proven easier on which to make significant progress. The latter—which simply put, refers to changes in the way the government works—has proven more difficult, with attempts at structural reforms in June 2013 failing to unleash growth.

But there are reasons to think incentives for reforms are increasing. One reason is demographics. As Japan’s population ages, its workforce is shrinking, creating distortions in the construction, medical, and services sectors that will need to be addressed.

To that end, Japan is still trying to keep alive the Trans-Pacific Partnership (TPP), which I previously described as Asia’s version of U.S. healthcare reform because it’s messy, a lot has been invested in it, and it won’t die. Japan also has a pact with the European Union that lowers barriers on virtually all the goods traded between them.

Looking ahead, there are a few issues to watch. First, Abe’s appointment as the head of the Bank of Japan in the spring of 2018 should be closely watched.  If it isn’t Haruhiko Kuroda for another term, it will likely be someone of a similar economic and philosophical bent. Second, in the run-up to the Lower House election, Abe has reaffirmed plans to increase the consumption tax to 10% in October 2019, but these types of proposed changes often prove elusive. Lastly, we will watch for any movement on Abe’s long standing desire to revise the constitution with respect to self-defense (Article 9).

While our portfolios have been geared more toward Asia ex-Japan equity markets, our assessment of a likely re-affirmation of leadership stability led us to shift some equity exposure back to Japan and away from China in September.

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Please carefully consider the Funds’ investment objective, risks, charges, and expenses before investing. This and other information is contained in the Funds’ prospectus, which you may obtain by calling +1 800 742 7272. Read it carefully before you invest or send money. Investing includes the risk of loss.

Any statements or opinions expressed are those of the author as of the date of publication, are subject to change without notice as economic and markets conditions dictate, and may not reflect the opinions of other investment teams within William Blair Investment Management, LLC or the Investment Management Division of William Blair & Company, L.L.C.

This content is for informational and educational purposes only and not intended as investment advice or a recommendation to buy or sell any security. Investment advice and recommendations can be provided only after careful consideration of an investor’s objectives, guidelines, and restrictions.

Factual information has been taken from sources we believe to be reliable, but its accuracy, completeness or interpretation cannot be guaranteed. Investments are subject to market risk. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be interpreted as investment advice, as an offer or solicitation, nor as the purchase or sale of any financial instrument. Statements concerning financial market trends are based on current market conditions, which will fluctuate.

William Blair does not provide legal or tax advice. Please consult your tax and/or legal counsel for specific tax questions and concerns.

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Copyright © 2017 William Blair & Company, L.L.C. "William Blair” is a registered trademark of William Blair & Company, L.L.C. No part of this material may be reproduced in any form, or referred to in any other publication, without express written consent.

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Any statements or opinions expressed are those of the author as of the date of publication, are subject to change without notice as economic and markets conditions dictate, and may not reflect the opinions of other investment teams within William Blair Investment Management, LLC or the Investment Management Division of William Blair & Company, L.L.C.

This content is for informational and educational purposes only and not intended as investment advice or a recommendation to buy or sell any security. Investment advice and recommendations can be provided only after careful consideration of an investor’s objectives, guidelines, and restrictions.

Factual information has been taken from sources we believe to be reliable, but its accuracy, completeness or interpretation cannot be guaranteed. Investments are subject to market risk. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be interpreted as investment advice, as an offer or solicitation, nor as the purchase or sale of any financial instrument. Statements concerning financial market trends are based on current market conditions, which will fluctuate.

William Blair does not provide legal or tax advice. Please consult your tax and/or legal counsel for specific tax questions and concerns.

Distributed by William Blair & Company, L.L.C., member FINRA/SIPC.

Copyright © 2017 William Blair & Company, L.L.C. "William Blair” is a registered trademark of William Blair & Company, L.L.C. No part of this material may be reproduced in any form, or referred to in any other publication, without express written consent.

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