“Putting peoples’ lives first,” is how Shingo Sugiura, the manager of the Melchior Japan Opportunities fund, explains the policy of the recent landslide election victors, the Democratic Party of Japan (DPJ).
“The most recent economic cycle, from 2002-7, was the longest recorded period of Japanese expansion,” he says. “But whilst corporate earnings reached record levels, this wealth did not translate to the domestic economy.”
“Devoid of actual sensation,” is the literal translation from the Japanese description of this growth, meaning that individuals did not feel any benefit from this recovery. Wages remained at 1994 levels and import prices were increased by a weakened yen. “People felt very little security in their everyday lives,” says Sugiura, “and they have voted for change.”
The DPJ’s policies are set to change this and Sugiura says they will deliver both social and economic benefit. “They will push up Japan’s growth rate,” he says.
He summarises the new government’s policy into five areas: eradication of wasteful spending, expansion of support for family, children and education, strengthening the pension system and medical care reform, introduction of greater regional sovereignty and improvement of employment policy, including tax reductions for small- and medium-sized enterprises, and promotion of new growth initiatives, such as environmental technology.
“It is the first time a government has tried to make such huge policy shifts,” Sugiura says. “But they are making fundamental changes, removing power from bureaucrats and placing it more firmly with government.”
Sugiura says the implications for the Japanese economy, and equity investors in Japan, are positive, but fund managers must look at the long-term picture as well as the short-term view.
“A lot of the equity market is focusing on short-term policy implications,” he says. “For example, child benefit allowances are being introduced so people are recommending buying companies that produce baby goods.”
Whilst Sugiura says this approach is not wrong, in constructing his own portfolios he looks for holdings with the potential “to play the cyclical recovery and bet on the longer-term as well.”
One example is Stanley Electric. A car lighting manufacturer, it has high exposure to Asia and is benefiting from the motorisation of emerging Asian economies.
Stanley Electric also develops lighting technology. Investment it has made in energy efficient lighting for car headlamps is becoming applicable for use in other lighting sources, meaning the company will benefit from increased investment in environmental technology.
Another holding Sugiura says will benefit from the change in government is Nichii Gakkan, Japan’s leading provider of outsourced services to the health industry.
The DPJ has promised to invest in healthcare and improve efficiency in the sector, which will increase immediate demand for outsourced services. Longer-term policies, such as increased provision of nursing homes to meet the demands of an ageing population, will sustain this growth.
Sugiura says major social and economic change in Japan will transform the way global investors view Japanese stocks.
“Japanese asset classes had degenerated into a purely cyclical play on the global economy,” he says. “But this change will lead to their fundamental re-evaluation.”