For years, journalists, analysts and fund managers have predicted a ‘new dawn’ in the land of the rising sun – to the point where it has become a running industry joke.
This has been the case ever since Japan’s ‘lost decade’ in the ’90s, when its asset price bubble popped and the economy entered a period of prolonged stagnation. Japan then found itself in something of a liquidity trap, with the Bank of Japan keeping monetary policy ultra-loose, but Japanese citizens and companies remaining too scared to spend their capital and sitting on piles of cash.
There have been times over the years when Japan’s Topix index has surged ahead of its global peers – notably in 2015 when it gained 17.8% compared with the MSCI ACWI’s total return of 3.3% – but these periods of stellar outperformance have not lasted for long. In the meanwhile, the US stockmarket continues to roar ahead, comfortably beating almost every other market consistently.
But could this time really be different for Japan? Last month, the Bank of Japan announced it would bring interest rates into positive territory for the first time in 17 years – admittedly up to 0.1%. The Topix has also performed well year to date in sterling terms, having already returned 10.2% to time of writing (28 March), according to data from FE Fundinfo. This is less than one percentage point behind the S&P 500.
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“In local currency terms, the Topix is up 52% in the past two years, while the S&P 500 is up a mere 22%,” explains Ernst Knacke, head of research at Shard Capital. “Granted, you’ve given back about 35% in currency terms. However, returns have been robust while the currency has reached extreme disparity from fundamentals such as unit-labour cost and purchasing price parity.
“After three decades marked by deflationary woes and a seemingly ever-increasing number of widows … equity markets are making all-time highs for the first time since 1989, amid talk of an end to deflation and what is generally perceived to be a beneficiary of a stumbling China. Investment conferences are filled with Japanese equity market bulls on what has become a market darling.”
New dawns and false starts
Simon Evan-Cook, multi-asset fund-of-funds manager at Downing, says he has seen many ‘new dawns’ for Japan during his career, but argues that it “might be unfair to suggest some of the previous new dawns didn’t play out”.
“Japanese equities have performed well over the past 10 years, which is when the late prime minister Shinzo Abe came into power with his sweeping ‘three arrows’ reforms. It’s just that they look lacklustre compared with the US market which, powered by the rise of ‘the magnificent seven’, has steam-rollered all before it.”
Ben Mackie, senior fund manager at Hawksmoor Fund Managers, goes as far as to say ‘false dawns’ in Japan over the years have been a “widely held misconception”.
Read the rest of this article in the April issue of Portfolio Adviser magazine
