Japanese equity fund managers have claimed that the long-awaited rise in the country’s consumption tax should be used by investors as an opportunity to “sell the rumour, buy the fact”.
Japan’s Topix index has dropped by 5.7 per cent in sterling terms year-to-date, due in part to fears about the impact of the rise in consumption tax from 5 per cent to 8 per cent.
It has led to a lot of ‘front-loading’ in the economy, with people buying goods in bulk before the tax hits, which has led to huge sales volume increases in March data.
This is likely to be reversed now that the tax is implemented and the next quarter is expected to be a tough one for the Japanese economy.
But managers have claimed the negative news has been priced in and that the market should now start to recover as it looks past the economic headwinds.
The two previous examples of a consumption tax rise don’t offer much of an indication of what may happen, given that both occurred during extreme periods in Japan’s economic cycle.
The tax was first introduced as a 3 per cent charge in 1989, but it had very little impact on the economy because it coincided with the peak of the boom years in Japan.
However, when the tax was raised from 3 per cent to 5 per cent in 1997, it coincided with a disastrous period for the region that culminated in the Asian financial crisis.
Andrew Rose, manager of the £1.2bn Schroder Tokyo fund, said it was therefore impossible to predict the long-term effects of the tax rise but said his “best guess is that there will be a weak quarter but the economy will not go into a recession”.
He explained that the government was aware of the negative impacts and had put in place a fiscal package to mitigate some of them.
However, there are still some economists predicting a recession for Japan.
Mr Rose has backed his prediction, though, and has been adding to Japanese retailers recently because the sector has been heavily sold off due to fears of the impact of the tax rise. If the economy does not enter a recession the stocks should rebound, he said.
Christophe Caspar, chief executive of multi-asset solutions at Russell Investments, said the market weakness in the lead-in to the tax rises should be exploited by investors as an opportunity to “sell the rumour, buy the fact”.
He said fears of a market correction caused by the tax rise were “misplaced”, adding that investors had extrapolated too much from the negative impact of the tax rise in 1997.
Mr Caspar said that the economic and fiscal situation was now completely different, with an accommodative central bank pumping money into the system and a weak yen boosting exports and economic growth.
Shoichi Mizusawa, manager of the £116.4m JPMorgan Japan Smaller Companies Trust, said the “short-term” impact of the rise in consumption tax did not change his long-term view that the stockmarket should continue to rally.
He acknowledged that the tax rise would hit economic data but said it was a necessary part of a “longer-term process by the government to address Japan’s large public debt burden, which is a real and important issue.”
