Japan is worth the extra effort
The market offers opportunities for investors willing to look for companies
Many great brands have come out of Japan throughout history – Hello Kitty, Nintendo, Toyota, Sony, among others – but on a macroeconomic level, the country has been in the doldrums for years.
Japan’s famous ‘lost decade’ was the result of the bursting of the asset-inflated bubble from 1989 onwards, which saw the Nikkei index plummet 63 per cent from its peak of 38,916 during the 1990s.
By the time the government injected trillions of yen in public funds at the tail end of the 1990s, the world’s second-biggest economy was already mired in a prolonged slump.
In spite of remaining the world’s third largest economy, Japan has been marginalised in the eyes of many investors on account of poor demographics, deflationary pressure and faster growth rates in emerging Asian economies.
There have been so many false dawns for the Japanese equity markets that it takes the skin of an elephant for any adviser to recommend a Japanese fund to form part of a client’s portfolio.
Last year, however, the best-performing fund across the entire IMA universe in 2011 was the Legg Mason Japan Equity fund, in spite of the country being struck by a devastating earthquake and subsequent tsunami.
In the year, it delivered 27.07 per cent, which the manager claims was a direct result of sticking to growth stocks, rather than looking for value.
According to Taku Arai, Japanese equity product manager at Schroders, Japan has been taking advantage of the lower costs in Asia for decades, by setting up offshore production bases in Asian countries.
This has been a major part of Japanese firms’ strategy to compete in export markets, particularly since the yen started appreciating rapidly against a number of other foreign currencies during the financial crisis, making yen-denominated exports more expensive.
“The development of Asian economies and, in particular, the increasing affluence of consumers throughout the region, will continue to provide a major opportunity for Japanese companies which possess both the technology and the production processes required to meet this demand,” he adds.
The Fukushima nuclear power plant disaster that took place in March 2011 led to an overall economic loss of more than $200bn (£125bn), making it the costliest natural catastrophe on record.
Nevertheless, in a very short time, most companies were able to recover production and corporate profits have largely returned to pre-earthquake levels. Some multinationals are reporting their best earnings ever.
Ernst Glanzmann, fund manager of the JB Japan Stock fund at Swiss & Global Asset Management, says: “It is remarkable how fast Japanese companies have recovered from the extraordinary events in March 2011, underlining their high flexibility and dynamics. Going forward, favourable raw material costs and the fairly neutral yen should make a positive contribution to input costs and help companies to expand margins and profits.