Japan’s revival begins to take flight

The Japanese stockmarket is surging as prime minister Shinzo Abe’s stimulus package spearheads a boom in investor confidence and signs of a wider economic recovery appear

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 Japan has endured it fair share of false starts over the years, leaving many an investor disappointed, but its prime minister’s extraordinary stimulus package is spearheading a major renaissance in investor confidence.

The hope now is that the scale of intervention will ultimately bring an end to the deflationary mentality which has troubled the nation for many years.

So far the signs have been encouraging. Since Shinzo Abe took office as prime minister in late 2012, the Japanese stockmarket has surged. A cursory glance at fund performance is also very encouraging. Over the past 12 months the average Japan fund is up 37 per cent while over six months the mean portfolio is ahead by 31 per cent. By way of comparison, the average North America portfolio is ahead by 21 per cent over the past half-year.

In addition the Bank of Japan recently delivered a report looking at the state of the nation which pointed to a wider recovery and expansion in the economy. In a statement, it said: “With regard to the outlook, Japan’s economy is expected to recover moderately on the back of the resilience in domestic demand and the pick-up in overseas economies.”

Abe’s policies, dubbed ‘Abenonmics’, consist of a three-pronged approach, namely monetary policy, fiscal policy and economic growth strategies. His massive programme of quantitative easing is pumping some ¥60tn (£400bn) a year into the economy while one of his key targets is to turn deflation into inflation, with an inflation target set at 2 per cent by 2015.

But Abe’s plans with regards to providing a programme of structural reforms to boost growth require some major tweaking of legislation and therefore political support. As such all eyes will have been on the Japanese parliament’s upper house election on 21 July, a major indictor of the public’s sentiment towards the policies, which have not only sent stockmarkets north but have brought the yen lower – a major boost for exporters.

F&C co-head of multi-manager Gary Potter, a self-confessed perennial bear towards the world’s third-largest economy, is now overweight Japan.

Potter says: “Even I am acknowledging that something is going on in Japan, that changes are actually taking place. There is a huge amount of quantitative easing going on and this will have an impact. Japanese corporate profitability is underestimated and we think the outlook is materially better. In addition, the yen is becoming more competitive.”

Legal & General Multi-Manager Balanced Trust co-manager Tim Gardner says the momentum which has been built and maintained since late last year is the most concerted and co-ordinated effort to pull Japan out of its economic funk in more than 20 years.

“The latest data continues to show positive signs,” he says. “Economic growth forecasts for Japan are currently being raised, which is hardly surprising as the Japanese economy grew at the fastest pace among the G7 economies during the first quarter of the year, with an initial estimate of a 0.9 per cent quarterly increase or 3.5 per cent per annum, which was recently revised up to 4.1 per cent.

“Add to this that the Japanese equity market is not expensive, then we remain comfortable with our high conviction position in Japanese equities across all three of our multi-manager trusts. Indeed, we used the sell-off in late May and early June to add further to our holdings.”

Henderson Income & Growth fund co-manager Paul O’Connor says the country could be one of the brighter spots within the global economy, given the dramatic change it is experiencing in its policy regime, with two of the government’s three ‘arrows’ for growth already in flight: hyper-easy monetary policy and increased government spending.

“We can probably expect these bold measures to continue – including more related to the third policy ‘arrow’ of longer-term structural reforms. Abe has just outlined a series of goals which he hopes will lift Japan’s growth rate to 3 per cent by 2020. These include increasing private-sector investment, infrastructure expenditure, encouraging more women into work and deregulation of goods, capital and labour markets. Consumer and business confidence has been improving and the country is also beginning to see upgrades to company earnings forecasts.”

That said, however, O’Connor points out that the recent jump in government bond yields and equity market volatility has raised some doubts about the efficacy and sustainability of the policy shift. 

“Investors are likely to remain sensitive to these issues and will require reassurances that policy changes will be managed carefully,” he says.

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