Many investors believe Abenomics has stalled, while others are awaiting the outcome from the consumption tax hike that came into effect on April 1.
Jason Hollands, managing director at Bestinvest, says he was bullish on Japan immediately following the election of a new government with a “radical reform mandate” at the end of 2012, but admits he has now pulled back on the basis that Abenomics had reached “a crossroads”.
“While there are undoubtedly many positive signs of an improvement in Japan’s prospects, including evidence that the deflationary cycle may have halted, a hike in sales tax this month from 5 to 8 per cent represents the biggest challenge, with this potentially snuffing out the recovery. The policy response, however, may simply be to accelerate the Bank of Japan’s programme of massively expanding the monetary base,” says Mr Hollands.
Those who were holding out for the announcement of additional stimulus from the Bank of Japan on April 8 were disappointed, though. The Bank held steady as it confirmed a continuation of monetary easing, with the aim of achieving a price stability target of 2 per cent.
Bank governor Haruhiko Kuroda says the country’s economy is expected to remain on a “moderate recovery”.
Meanwhile, the Japanese yen is being seen as something of a “safe haven” currency, as investors flee from the perceived risk in emerging market currencies.
Tony Lanning, manager of JP Morgan Fusion Funds, observes that during the “euphoria” surrounding Abenomics last year, the Topix index rallied 45 per cent. But it seems the party is over, as Mr Lanning points out that investors are beginning to question the effectiveness of prime minister Abe’s growth strategy and ability to make structural reforms.
“In spite of the challenging start to the year, we retain conviction that Japan will reap the benefits of reform and are encouraged by signs affirming this. Wage hikes are seen as key to boosting an economy that has been faced with falling prices for two decades, and the recent round of union wage negotiations saw almost all companies in the negotiation process agreeing to wage increases, some for the first time since 2001.
“Most importantly, however, Japanese companies are increasingly focusing on shareholder value and profitability rather than their traditional model of pursuing market share.”
It is on the back of this trend that JO Hambro Capital Management (JOHCM) launched a new Japan fund at the end of March this year, indicating its belief in the region to deliver returns.
The JOHCM Japan Dividend Growth fund is managed by Japanese equity investors Scott McGlashan and Ruth Nash and will incorporate a blend of dividend growth and yield, having noted that dividends are “climbing” in Japan.
Of the funds listed in the IMA Japan sector, the Legg Mason Japan Equity fund run by Hideo Shiozumi led outperformance for the three years to April 9 2014, with a return of 111.03 per cent. This is followed by the £488.2m Baillie Gifford Japanese fund, with a return of 40.54 per cent and the CF Morant Wright Nippon Yield fund, according to data from FE Analytics.
Mr Kuroda highlights that the prospects for Japan will be affected by factors such as developments in the emerging economies, the scope of European debt and the pace of US economic recovery.
Mark Davids, who manages the JP Morgan Japan Strategic Value fund, agrees that the country’s economic prospects has to be viewed in light of global developments.
“It is all very well to talk about Japan in isolation, but a lot depends on what happens in the rest of the world. You can’t judge where the yen will go without an appreciation of whether the US economy is still strong.”
Mr Davids adds: “If the Fed continues to taper, that is good for a weakening yen, but it is hard to be bullish on Japan without also being bullish on the US.”
While some investors look to be adopting a wait-and-see approach to Japan, there are many who still believe in Abenomics and the prime minister’s ability to return the country’s economy to strength.
Ellie Duncan is deputy features editor at Investment Adviser
FUND PICKS
Jason Hollands, managing director of Bestinvest, has flagged three Japan funds for those investors who have not yet written off Japan’s prospects.
CF Morant Wright Nippon Yield fund
Mr Hollands suggests this fund is one for investors “wanting to play the stakes” and likes the Morant Wright Nippon Yield fund for smaller companies. The team at Morant Wright only invests in Japanese equities and has a stock selection process based on fundamental analysis. The £150m fund aims to generate returns by investing in undervalued Japanese companies. It has outperformed the IMA Japan sector during the medium term, with a three-year return to April 10 of 34.16 per cent, placing it third among the IMA Japan sector.
GLG Japan CoreAlpha fund
Stephen Harker, who has more than 25 years of experience investing in Japan, manages this £1.2bn fund, which was launched in January 2006. Its three-year performance to April 10 puts it in the second quartile of the IMA Japan sector with a return of 17.03 per cent, although across 10 years the fund has returned 77.16 per cent, placing it top quartile. The manager looks for capital growth by investing in the quoted securities of companies operating in Japan.
JO Hambro CM Japan
Scott McGlashan and Ruth Nash manage the £592.1m JOHCM Japan fund, pursuing a stock-picking approach with a small- and mid-cap bias. A common theme is to find companies where there is a catalyst for re-evaluation by investors, says Mr Hollands. The fund, which launched in May 2004, has been “soft closed” to new investors. According to FE Analytics, it has delivered a return of 26.59 per cent across three years to April 10, ranking seventh among the IMA Japan sector funds.
