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.
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.
PICKS
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.
Baillie Gifford Japan Trust
This investment trust is managed by Sarah Whitley and has total assets of £274.56m. Performance of the trust has been consistently strong, topping the AIC Japan Equities sector across one, three and five years, a record that has placed it in the 2013 Investment Adviser 100 Club. The vehicle holds between 40-70 positions, mainly in small- to medium-sized companies with a focus on good growth opportunities. The highest sector weighting is to commerce and services at 24.5 per cent of the portfolio.
EDITOR’S PICK
GLG Japan CoreAlpha
Managed by Stephen Harker, Neil Edwards and Jeff Atherton, this £1.24bn fund is one of the largest and best-known in the IMA Japan sector. It has a strong long term track record, although its three year performance has drifted, with a return of 5.77 per cent compared with the sector average of 7.96 per cent to February 19 2014. However, the team appear to have got it back on track recently, with the 12 month return of 15.94 per cent pushing it back into the first quartile. In spite of the dips, this has a strong track record and team dynamic and is not one to rule out.
