What about the J-pop girl band, Machikado Keiki Japan, who promised to shorten their skirts for every 1,000 yen increase in Japan’s stock prices? I’d best not Google them in work time, but I guess things went a bit quiet after the rally in the Topix and Nikkei in the first half of this year.
With such home-grown enthusiasm for economic revival, surely investors can’t go wrong? Perhaps that’s overstated, though Coutts estimates that personal consumption will contribute almost two-thirds of Japan’s GDP growth by the end of 2015, which could rise to 2.2%.
A novelty?
For many UK investors, Japanese equity as an asset class is still something of a novelty – avoided over the past decade for good reason; Abe’s Three Arrows programme has more recently raised interest and assets as many joined in on the contrarian play.true
But with enthusiasm having since dampened and Japanese indices having traded flat since June, are investors who jumped in at the start of this year going to retain their confidence as they would traditionally with other developed markets (with the exception perhaps of Europe)?
Despite the recent rally, Marcus Brookes, manager of the Schroders-owned Cazenove multi-manager funds range, still points to an underperformance of around 70% in Japanese equities compared to the S&P 500 since the market turned in March 2009.
He says: “If we say the S&P 500 should be the best index in the world because America appears to be on a good pathway to growth and Japan hasn’t quite got there yet, then maybe Japan needs to be on a discount to the US – but how much? For us 70% is too much and it’s not like we didn’t know Japan has got problems. We still think it has a long way to go.
“For the past 10 years who wanted to talk about Japan? You have some fantastic brand names like Honda and Toyota quietly doing pretty well and quietly being the most efficient producers in the world and quietly starting to talk about labour reforms.”
Any investor favouring the Japan story must of course take into account currency when determining which fund to use – Brookes favours the unhedged version of the Stephen Harker-led GLG Japan Core Alpha fund.
Mark McFarland, global chief economist at Coutts, believes the yen is likely to weaken over the next two years; however the currency continues to be backed as a ‘safe haven’.
A safe haven
“With US rates likely to start rising in 2015 we expect the dollar to hit ¥115 by the end of 2015. The yen can be expected to retain its status as a safe haven during periods of risk aversion in world markets,” he says.
“But economic reform and public debt reduction measures should give the Bank of Japan more room to engage in massive quantitative easing without unduly damaging sentiment toward the yen.”
So what of demographics? Another stat doing the rounds recently is that adult ‘nappies’ are forecast to outsell baby nappies in Japan by 2020. Surely the biggest concern for long-term investors is an ageing population?
Sarah Whitley, manager of Baillie Gifford Japanese fund, sees things in a different light believing, like Brookes, that the country is currently sitting on a huge opportunity to reform its labour market.
“Japan’s current level of unemployment is 3.8%, which I think most other developed markets would find quite convenient, and there are beginning to be labour shortages,” she notes.
“Japan can reform its labour market so they can move more freely and let the growing companies to recruit people. To a certain extent it is a positive at the moment. In terms of overall demand, Japanese companies benefit from demand around the world and they are not just confined to the domestic story.”
Want to read more on currency affairs, check out Shaun Port’s views here.
