Fund Review: Japan

After decades of deflation, struggling stockmarkets, stagnant growth and numerous false dawns, there may finally be light at the end of the tunnel for investors in Japan.

Prime minister Shinzo Abe is credited, along with Bank of Japan (BoJ) governor Haruhiko Kuroda, for the majority of the economic improvements. According to the Organisation for Economic Co-operation and Development (OECD), consumer prices inflation in 2013 reached the dizzying heights of 0.4 per cent.

GDP growth has also been improving, although the latest data shows growth in the fourth quarter of 2013 was below expectations at just 0.3 per cent.

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However, the BoJ responded quickly with plans to extend and expand two of its lending programmes to encourage banks to lend more money.

Adrian Lowcock, senior investment manager at Hargreaves Lansdown, points out: “The willingness of the BoJ to loosen monetary policy caused the yen to initially fall 1 per cent against sterling and the US dollar. A weaker yen will be good news for exporting Japanese companies whose earnings and profits have already been boosted from falls in the currency in 2013.”

This willingness on the part of the government and the central bank to pursue the strategy of growing the economy and increasing inflation could be the thing that has been lacking in other Japanese attempts to reform its economy. It has also had a beneficial impact on the Japanese stockmarket.

The IMA Japan sector has delivered a return of 11.18 per cent for the 12 months to February 19 2014, in spite of the slight pullback at the start of the year. The Nikkei 225 index returned 9.77 per cent in the same period while the Topix index delivered a return of 8.98 per cent, according to data from FE Analytics.

Simon Edelsten, co-manager of the Artemis Global Select fund, notes: “In the 18 months since Mr Abe won a landslide election victory, the yen has fallen by a third. This has made many world-leading Japanese businesses highly competitive, especially against European businesses facing a strong euro.

“But, interestingly, the Japanese trade data does not show an export surge. Many Japanese exporters are not rushing to win market share and are instead enjoying higher profit margins.”

This weak export performance suggests to Jeremy Lawson, chief economist at Standard Life Investments, that some of the country’s problems have been ‘misdiagnosed’.

“Structural reforms are the key to boosting exports in the longer term, as well as unlocking domestic growth potential and encouraging portfolio investment in Japanese companies. Currency devaluation can only ever be a stop-gap measure.”

Mr Abe has still to implement the ‘third arrow’ of Abenomics in terms of structural reform, while wage negotiations in March could affect consumer spending. If Abenomics falters, or worse fails, then the best chance of a Japanese resurgence could disappear.


Old Mutual Japanese Equity

This is one of the smaller funds in the IMA Japan sector at just £29.8m, in spite of having launched in 1986. Currently managed by a team led by Ian Heslop and comprising Amadeo Alentorn and Mike Servent this fund has placed in the top 10 of the sector across one-, three-, five- and 10-year periods. It is a widely diversified portfolio with approximately 183 stocks and the highest sector weighting is to consumer discretionary at 25.9 per cent of the portfolio.