For two decades the Japanese equity market was the graveyard of investment champions.
Global equity fund managers who strayed in on the promise of cheap valuations and good companies suffered badly. These waves of disappointment have produced deep cynicism towards the country among British investors. So deep-seated is this scepticism towards Japan that after three years of extraordinary economic reform and stockmarket growth, most global fund managers and private client investors remain extraordinarily underweight. Those who have some conviction towards the country have taken weightings of 2 per cent or 4 per cent – still massively under the 8 per cent of the MSCI World index that Japan forms.
The scar tissue formed for investors who ventured to Japan in the 90s and noughties is understandable. But it is also irrational and fails to recognise just how far this nation has come under prime minister Shinzo Abe.
Sceptics of Mr Abe’s reforms say it is all just policy-driven steroid shots in the arm of an elderly patient. Where, they ask, are the blockbuster reforms that can truly transform the economy? The answer is everywhere – only it is not three big arrows, but thousands of small ones.
There is progress in corporate governance with a new code set to be finalised in June. This new programme enhances the prospects for return on equity and is, in part, a function of the decision by the government pension scheme to significantly build its equity holdings. That decision forces the Japanese political class to emphasise the sort of good governance that can improve shareholder returns and is leading to a generationally important shake-up of Japanese business practice.
Japan is also embarking on the first reforms of its electricity and gas markets in 60 years. This will liberalise the retail energy market, lower prices and raise productivity. Away from Tokyo, major agricultural reform is to be agreed within this parliament. This will open up the possibility of creating larger farms and increased productivity.
In immigration law, Japan is moving to allow greater migration of foreign nursing care workers to plug the holes in its tight labour market.
One of the essential criticisms of the Japanese economy is that its fixation on full employment has led to stagnant wages and ensuing deflation. Mr Abe has said he plans to change this, but many argue he will never remove this embedded behaviour.
The facts, however, contradict that cynicism. In 2014, Mr Abe formed a trilateral partnership between employers, unions and the government to push for wage rises and for more employees to be shifted to regular work contracts – clearly beneficial for consumption. Many Japanese companies have already responded.
Another important element of Mr Abe’s progress on labour reform is that companies are agreeing to move pay structures from seniority-based to performance-based formats. This gets to the heart of tackling one of the forces that has held back productivity growth in Japanese business.
We see evidence of pay negotiations leading not merely to higher bonuses but also to higher basic wages in 2015.
Some have argued that ‘Abenomics’ – the name given to Mr Abe’s efforts to boost the economy – merely inflates the profits of multinationals that benefit from the weak yen, and it does do that. But the Bank of Japan is now talking about wage growth in small- and medium-sized businesses, as well as domestically focused sectors. For example, tourism is set to boom as the weak yen makes Tokyo an attractive destination for Asian tourists.
It is true that for many years Japan was among the most cyclical developed markets. But today it is one of the only major economies – other than the US – that enjoys independent market drivers.
These drivers include a fundamental shift from deflation to inflation, massive equity buying by the government pension scheme, a reforming labour market, the prospect of more qualitative and quantitative easing, and an accelerating pace to ‘third-arrow’ reforms.
An investment conference earlier this year produced a defining anecdote to show the extent to which Japanese policy is stacked in favour of equity investors. Mr Abe himself appeared, walked on stage and gave a brief speech outlining how he was going to work to drive up share prices for investors. I wonder if anyone can imagine David Cameron, Angela Merkel or Barack Obama making statements like that?
Robin Geffen is chief executive of Neptune Investment Management
JAPANESE COMPANIES ARE RAISING WAGES
All Nippon Airways
All the newly employed flight attendants have been full time, and current non-regular workers will be transferred to regular workers over time. Currently, 4,400 out of 6,000 are full time.
Starbucks
All the 800 non-regular workers have been converted to regular employees.
American Home (Japan)
840 non-regular workers have been converted to full time.
Uniqlo
Converting non-regular workers into “local full-time workers” with more flexible working hours (500 already converted).
Bank of Tokyo-Mitsubishi
Job terms for non-regular workers can be extended to age 60 if they so wish.
Ikea
Contracts for non-regular workers can be extended indefinitely.
Tokyo Disneyland
Switching all 821 non-regular workers to regular workers if they wish.
Source: Neptune Investment Management
