Patience required for Japan recovery

Fund managers have said investors will have to be patient for domestic structural reforms to come through in Japan as a result of the country’s overhauled economic policy.

Japan’s prime minister Shinzo Abe gained power last year with a promise that he would re-energise the country’s ailing economy based on a “three arrow” plan of monetary policy, fiscal policy and structural reforms.

The move, which has since been dubbed “Abenomics” fuelled rapid rises in the country’s stockmarket and has also helped to weaken the yen, the strength of which had impacted company profitability and the country’s exporters.

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But while fund managers are largely supportive of the impact Abenomics has had so far –seen in improved GDP numbers, business confidence and core inflation reaching zero for the first time since 2009 – they argue structural reforms that will have a lasting impact on the economy are some way off.

These include labour reforms to get more people in full-time employment and the removal of trade barriers that have been enacted as protectionist policies.

Scott McGlashan, co-manager of the £511m JOHCM Japan fund, said there were encouraging signs in Japan of an increase in consumption that “clearly shows the population expects times to get better”, but that the third arrow of structural reform “remained in its quiver”.

“We have not seen structural reform simply because the economy is chugging along quite nicely,” he said.

“The urgency has diminished for the third arrow and the mixture of policies will be potential vote losers. There is more of a political battle to change things like employment laws.”

Mr McGlashan said for Abenomics to succeed in the long term, structural reforms would need to be seen in the next three-to-five years.

But the manager said a positive economic cycle could be created by the weaker yen because profits in yen terms will rise this year.

“If companies invest, it stimulates more growth and if they pay higher wages it helps retail sales, which means you get a virtuous circle,” he said.

Chris Taylor, manager of Neptune’s £193.2m Japan Opportunities fund, agreed the first two arrows of Mr Abe’s plan had worked in terms of boosting domestic consumption, creating inflation and auguring a 15 per cent weakening of the yen from its peak in 2012.

But he said labour reforms and agreeing to changes of the Trans-Pacific Partnership, which would help remove trade barriers, were longer term changes that investors would have to wait for.

“Arrows one and two have already changed things as the yen has come down, there is real positive economic growth, positive inflation and consumption is growing in real terms – these are fundamental improvements,” he said.

“The next batch is related to the domestic economy in terms of profits feeding through to increase full-time employment and increased wages, which will increase consumption and improve the government tax take.”