Japanese Prime Minister Shinzo Abe has recently announced his government is to introduce a ¥28tn (£200bn) package to boost the country’s flagging economy.
The move had been expected in the wake of the UK’s vote to leave the EU, which Abe had warned would negatively hit the Japanese economy. However, the amount itself took markets by surprise, being far bigger than earlier estimates.
While the shares in Tokyo jumped on the news, some have raised concerns about whether this fresh amount will have any real impact. Experts say the impact is unlikely to be felt immediately.
By now, international investors should be fully versed in the troubles of Japan. The economy has been in a two-decade-long slump of low prices and low wage growth. Consumer spending accounts for 60 per cent of the economy but many consumers feel nervous about spending their money because they are insecure about their financial future.
That is despite three years of Abenomics – the term coined to describe Abe’s three-pronged fiscal, monetary and structural approach to fixing the country’s economic woes. Even the Bank of Japan’s controversial move in January to push interest rates below zero failed to get people parting with their cash.
Economists say Japan’s problems are much bigger and more complicated than the government is willing to acknowledge, and that Abe needs to implement tough reforms, such as getting more women in the workforce and allowing more foreign workers in.
As troubling as Japan’s deflationary, and now negative interest rate, economic quagmire is, the biggest threat it faces is its demographics. Not only is Japan’s population the oldest it has ever been, as well as the oldest on average in the entire world, but it declined last year for the first time in nearly a century, according to data by the Ministry of Internal Affairs and Communications.
However, it is this rapidly shrinking economy and aging population where manager of the Legg Mason IF Japan Equity fund sees opportunities. Hideo Shiozumi’s concentrated portfolio of between 25 and 60 holdings seeks to achieve capital growth through investment in businesses that benefit from the structural changes in the domestic economy, which he calls the “New Japan” theme.
The manager, who boasts some 40 years’ experience in Japanese equities, focuses on fast-growing companies that can exploit opportunities relating to Japan’s advanced elderly society, changes in consumer spending and lifestyles, and a broadening internet-oriented economy. In particular, the team looks for companies with strong sales and earnings growth, focusing on the past two years and next two years, but which are attractively valued.
The fund tends to favour small- to mid-cap companies that are expected to be the principal beneficiaries of the New Japan. This leads it to have an emphasis on the services, healthcare and distribution sectors of the market.
Shiozumi notes the fund’s investment strategy has remained the same since its inception in 1996. It has never invested in financials, cyclicals and large-cap, export-oriented manufacturers.
For the past five years, the fund has been the top performer in the IA Japan sector, returning 282 per cent compared to the sector average of 53 per cent and index return of 56 per cent, according to FE Analytics.
Over the past one and three years, the fund has returned 61 per cent and 106 per cent, compared to the 12 per cent and 28 per cent from its peers. Its outperformance versus the Topix skirts the same levels.
The manager credits the fund’s significant exposure to the medical and healthcare sectors as key contributors to these notable returns.
However, as with most things in life, returns have not come without a price. The fund has had substantial periods of both under and outperformance, as evidenced by huge losses in 2006 and 2007, but large gains in 2013 and 2015.
It is one of the most volatile in its sector, currently holding an FE risk score of 194 (zero akin to holding cash and 100 akin to the volatility of the FTSE 100), and as a result will not be suitable for the fainthearted.
Tahmina Mannan is market industry content editor at FE