After a period of optimism fuelled by Prime Minister Shinzo Abe’s commitment to the ‘three arrows’ of monetary easing, fiscal stimulus and structural reform, the last 12 months have been a volatile period for Japanese equity investors. China’s slowing economy and the first rise in US interest rates for more than five years unsettled global markets; then in 2016, the Bank of Japan’s (BoJ) decision to introduce negative interest rates on excess bank deposits proved another surprise as well.
Room for optimism
Nevertheless, there may be room for greater optimism than current sentiment might suggest. The BoJ’s unconventional move reflects the authorities’ strong commitment to pull Japan out of deflation. The aim is to boost borrowing and capital expenditure with negative real rates and, ultimately, increase consumption and investment.
Our longer term outlook for many Japanese companies remains positive, primarily due to structural reasons such as corporate governance reforms that could encourage management to be more profit and shareholder-oriented. Negative interest rates have already led to a reduction in deposit rates to near zero, and there is talk of banks charging institutions and corporations for large savings deposits. These moves may incentivise managements to put their surplus cash to work, such as increasing capital expenditure, raising dividends or embarking on share buybacks. These are compelling options, given the growing emphasis on corporate governance.
We also see potential in certain investment themes, including inbound tourism – which has significant government support. This is a theme that we believe could have a long runway for growth, even with the slowdown in China. In 2014, 2.4 million Chinese tourists visited Japan. In 2015, that figure reached 5 million, but this only represents a tiny fraction of more than 100 million Chinese outbound travellers.[1] It is still less than half the number of Chinese travellers to South Korea in 2015, and significantly less than those going to Thailand or Taiwan. Now that Japan’s ‘gates are opened’, we see scope for this to change. Equity portfolios can gain exposure to growing visitor numbers via the hospitality industry or through real estate; our focus is on companies likely to benefit from higher tourist spending.
That said, the negative interest rate policy (NIRP) has weighed on the banking sector recently, as investors have been concerned about potential pressure on margins. The policy has very different implications, of course, within financials; domestically-focused banks may be negatively affected, while asset managers and brokers might be beneficiaries if the NIRP drives investment into higher risk investment strategies. We are in the process of researching the implications for the industry more fully.
[1] Estimated visitor numbers for 2015 calendar year. As at 19 January 2016. Source: Bloomberg
