With two of Japanese prime minister Shinzo Abe’s three ‘Abenomics’ policies – fiscal stimulus and monetary easing – already well underway, attention has turned to the implementation of promised structural reforms.
But even considering Abe’s rapidity in firing two of the arrows from his economic quiver, the investment camp remains decidedly split on whether the structural issues are too entrenched to be resolved.
Kevin Gibson, equity CIO at Eastspring Investments, believes that cynical investors need to disregard the past and focus on Japan’s conviction towards a better future, particularly the changes being made to corporate governance.
“The market is too impatient on Japan,” he said. “It has been a while coming, but now the government is implementing changes that make for a very positive future outlook.”
“Out of Abe’s ‘three arrows’, the corporate reforms are the most important. Japanese companies have, on the whole, traditionally sat on huge amounts of cash, and have always been resistant to using it to pay out shareholder dividends or reinvest in the business. Bringing in legislation to unlock that cash is key to driving returns and encouraging overseas investors – those who have not already – to invest in the market.”
Gibson continued: “The history of Japan and the way companies have operated there in the past means that some people are sceptical as to whether this time is the one where it finally changes for good.
“But Abe has shown that he wants serious change and is on the way to implementing those changes. Unlike some other markets, such as China, the corporate reforms being introduced in Japan are ‘real’.”
Rising tide
Richard Philbin, CIO at Harwood Capital, says that investors need only look as far as the Japanese equity market’s performance in recent years to see that the market trajectory is a positive one.
“The Japanese market has doubled in the last three years,” he expanded. “The TOPIX index is up 140% in local currency terms. Investors should be aware of the negative impact that QE has had on the currency, and if you own a dollar-based fund there you will have done very well out of it.”
Furthermore, Philbin believes that the outlook could be even better if the Government Pension Investment Fund follows its decision to mirror the JPX-Nikkei 400 with an increase in the fund’s equity holdings.
The key difference, says Philbin, lies between the indices’ admission criteria; the JPX index is based on companies’ profitability, efficient use of capital and investor-focused management as opposed to straight-forward market capital, and a GPIF equity increase could see a wave of money pushing the market even higher.
“The GPIF has decided it wants to replicate the JPX 400, and there are a lot of companies that want to be in the JPX 400 in order to save face,” he explained. “So these companies will all of sudden become cash-efficient and give dividends back, do share buybacks or execute mergers and acquisitions to be able to get into the index.
“If the GPIF changes its allocation from fixed income to equity and moves that from the TOPIX index to the JPX there will be a massive wall of money, not only supporting the JPX but also potentially driving it higher.”
