Introduction
Japan’s move into recession in the third quarter and concerns about inflation led to Mr Abe delaying the next planned consumption tax and calling a snap election in December in an attempt to shore up the economy and confidence in his reforms.
While he won the election comfortably, the low voter turnout and disappointing business confidence figures meant Japanese markets dipped slightly lower post election, with the Nikkei 225 and Topix indices ending the year with less than stellar returns.
In 2014 the Topix index delivered a return of just 2.68 per cent to December 31, while the Nikkei 225 index recorded a loss of 0.54 per cent, according to data from FE Analytics.
So as 2015 begins, is Japan due a turnaround?
Stephen Cohen, chief investment strategist for iShares EMEA, suggests the election result provides a “relatively stable political environment for the next two years and beyond, and potentially makes Mr Abe its longest serving premier in four decades”.
But he adds: “It may not be an immediate catalyst for stronger equities. A landslide win by the ruling coalition had been widely expected and largely priced in, especially after Mr Abe postponed the unpopular second tax hike. But in the medium to long term, it removes much political uncertainty for Mr Abe, who faces his own party’s presidential election in late 2015 and an upper house election in 2016.
“Economic improvement will continue to be a focus. The low turnout rate at the election – at 52 per cent, it was a post-war low – reflects broader discontent over the recession and slow income growth.”
Meanwhile, John Vail, chief global strategist at Nikko Asset Management, points out Mr Abe’s re-election could help push forward economic reforms in government ministries and the business community.
“The lack of significant wage increases has been a major reason why Abenomics is not working very well for individuals – and thus, personal consumption and GDP growth, in general – but this victory should help [Mr Abe] convince companies to be more proactive in this regard,” says Mr Vail.
“Corporate profit margins are at historical highs, corporate taxes have been already cut (with promises for more) and Japan requires a broadly spread distribution of economic benefits for the recovery to be durable, so it is logical that corporations will raise wages. Indeed, if certain companies do not, it is entirely possible that Mr Abe will publicly point this out rather directly.”
With Mr Abe given a clear mandate to continue with his reforms, the outlook for Japan in the near future at least looks more cheerful, but whether it lasts will most likely depend on the success of Abenomics in boosting growth and inflation.
THE PICKS
Axa Framlington Japan
A sometimes overlooked offering, this £53.5m fund is at the smaller end of the spectrum. Launched in February 1984 it is managed by Chisako Hardie, who joined Axa Framlington in June 2006. It aims to provide capital growth through investment in Japan, but also in other areas of the Far East, with a focus on companies that show above-average profitability, management quality and growth. It is ranked in the top five of the Investment Association Japan sector across one and three years to December 16 and remains top quartile for the five-year period with a return of 44.74 per cent, although it slips into the third quartile across 10 years with a return of just 52.66 per cent.
Aberdeen Japan Equity
Launched in August 1992, this £461.4m fund is managed by the Aberdeen Asian equities team and has delivered consistent top-quartile performance. It is the second best performing fund in the Investment Association Japan sector for the 12 months to December 16 with a return of 8.79 per cent, while its five-year return of 57.59 per cent places it in the top five in the sector. Its largest sector weighting is to consumer goods at 32.7 per cent of the portfolio, while its top 10 holdings include Toyota and Canon.
EDITOR’S PICK
Neptune Japan Opportunities
This £465.4m fund was launched in September 2002 and is managed by Chris Taylor, with George Boyd-Bowman as assistant manager. It aims to provide capital growth by investing in a relatively concentrated portfolio of between 40-60 stocks. It is top quartile in the Investment Association Japan sector across one and three years, just falling into the second quartile over five years to December 16 2014 with a return of 40.95 per cent. That said, its 10-year return of 217.65 per cent tops the sector. Its largest sector weighting is to industrials at 29.7 per cent of the portfolio, while its top 10 holdings include Toyota, Hitachi, and Daiwa Securities.
