“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.”
He added that while Japanese companies had benefited from a rise in profits because overseas earnings now transferred into a greater amount of yen, this had not yet fed through to wages.
“The benefit of that has not fed through to wages or an increase in the amount of full-time workers,” he said.
“That is the key to getting the domestic economy going. We will have to wait and companies will spend money on wages and employment.”
Hideo Shiozumi, manager of Legg Mason’s £235m Japan Equity fund, which is a member of the Investment Adviser 100 Club of top performing funds, said that the economy had improved “substantially” in the past 10 months and that the Abe reforms had produced a “positive impact” on the economy.
But he said challenges remained and would need to be overcome for an entrenched recovery to happen.
“Now that Abe has made a decision to increase the consumption tax from the current 5 per cent to 8 per cent in April 2014, he will have to implement sufficient stimulus measures at the same time in order to offset the negative impact of the tax increase,” he said.
“The biggest challenges are for the Abe administration to achieve 2 per cent inflation in two years’ time, average growth of 3 per cent nominal and 2 per cent real GDP for the next 10 years and post a surplus in the primary balance by 2020.”