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The investment case for Japan - August 2013



    Paul Chesson, head of Japanese equities at Invesco Perpetual, explains: “After several years of instability in Japanese politics and a succession of prime ministers this [majority in the Upper House] consolidates prime minister Shinzo Abe’s position and provides the platform for structural change in Japan.

    “Considerable uncertainty remains about the extent and effectiveness of the government’s growth strategy, but in our view it simply adds a potential positive to an already attractive investment story.”

    In spite of the rally in the Japanese stockmarket since Mr Abe came to power in December 2012, valuations on Japanese equities are not stretched and still offer investors the potential for powerful earnings growth. Mr Chesson adds: “Equity valuations for Japan’s Topix index, which are comparable to other developed markets on earnings measures, remain at a discount on asset based multiples and companies should see more than 55 per cent earnings per share growth this fiscal year based on Bloomberg consensus estimates.”

    Psigma Investment Management’s chief investment officer Thomas Becket agrees, claiming that even after the 70 per cent rally, it isn’t too late for investors to be looking at Japan for opportunities.

    “From a valuation perspective, it is hard to argue that Japanese companies are expensively valued and there remains the potential for a long-term growth surprise, which is under appreciated by investors. Indeed, if Mr Abe is successful in weakening the yen further then Japanese companies could still be very cheap. We also think that the high levels of scepticism from many global investors and under-ownership of Japanese equities could lengthen this rally substantially. Fund managers who have refused to consider investing in Japan on the understandable basis of two decades of barely interrupted pain are now feeling the heat of a market that has soared from the November lows and is up nearly 40 per cent this year.”

    The political reign of Mr Abe, and the effects his policies have had on the stockmarket, have caused many to draw comparisons to previous prime minister Junichiro Koizumi, who imposed a number of structural reforms resulting in a rally lasting eight months. But Kentaro Sasaki, managing director and head of equity research in the Japan research driven team at JPMorgan Asset Management, notes that the Asia Pacific region has long been plagued by politicians serving terms of less than a year, too short to really make a difference.

    “Continuity of government is particularly important for Japan as the average length of the term of office for the prior six prime ministers, including Mr Abe himself in his first appointment after Mr Koizumi, is only just more than one year,” he says.

    For years Japan has lingered in a deflationary environment and only now does the government appear to be taking steps to solve it. Mr Sasaki explains: “Deflation weakens the economy in many ways. Expectations of falling prices tend to encourage consumers to postpone spending, which, in turn, causes the corporate sector to expect little market growth inside the country. These expectations naturally constrain investment in employment and capital stock. As a result, nominal GDP stops growing, or, in a weak global economic environment, begins to shrink. Deflation is therefore a highly negative backdrop for the stockmarket.”

    There is no denying that the outlook for a success story in Japan this time round is promising, but investors would be right to remain cautious, as Neil Williams, chief economist for Hermes’ global government and inflation bonds, concludes: “Japan’s day in the economic sun will come. But, Mr Abe will have to pedal harder to make sure the progress so far is more than another false dawn.”

    Jenny Lowe is features editor at Investment Adviser

    In this special report


    Please answer the six multiple choice questions below in order to bank your CPD. Multiple attempts are available until all questions are correctly answered.

    1. Alongside monetary policy to tackle deflation and fiscal policy to reduce debt and boost the economy, what is the third ‘arrow’ of Abenomics?

    2. How much does the ¥10.3trn (£68.9bn) of stimulus injected into the Japanese economy since February equate to a percentage of GDP?

    3. What is the current approximate debt-to-GDP ratio in Japan?

    4. How much was the supplementary budget announced by Shinzo Abe in February?

    5. The latest figures from the IMA reveal the highest monthly inflows into Japan funds in almost two years. How much did net retails sales total?

    6. And what was the average outflow over the previous 12 months?

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