InvestmentsNov 13 2014

Investors turn bullish over Abe’s new boost

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Some investors have begun to turn bullish on the country in the past year based on the view prime minister Shinzo Abe can restore the country’s fortunes with his expansionary fiscal policies and steer the country away from another deflationary cycle.

However, it still has its detractors given many people have lost money investing in Japan after believing it would be ‘different this time’.

But experts have said even more investors are now likely to have little choice than to invest in Japanese equities given the huge tailwinds, including a surprise move by the Bank of Japan last month to boost its support for the economy.

Steven Bell, chief economist at F&C Investments, said he is considering selling the dollar/yen trade in his £123.6m Macro Global Bond and £398m Diversified Growth funds because it had produced strong returns.

However, he plans to maintain his Nikkei positions as he expects equities to rally further.

“Given the economic data, investors will be dragged kicking and screaming into Japanese equities,” he said.

Investors underweight Japan will have missed the full force of the rally since the October 31 stimulus boost by the Bank of Japan. The Nikkei 225 index rose more than 3 per cent in yen terms in just a few days, hitting a seven-year high on November 4.

Japan’s Government Pension Investment Fund also recently confirmed it would amplify its exposure to Japanese equities, providing another potential shot in the arm for the asset class.

Keith Wade, chief economist at Schroders, said underlying inflation was running at just 1 per cent once the impact of the consumption tax was stripped out, well short of the 2 per cent targeted by policymakers.

“We have been anticipating such action for some time, as we always had doubts about the economy’s ability to withstand the increase in consumption tax,” he said.

“Although household wage growth had picked up, it has not accelerated sufficiently to offset the tightening of fiscal policy, and as a result, households in Japan have experienced a fall in real income.”

Mr Wade said against this backdrop, consumer spending could “not possibly lift the economy back to a growth rate which would generate inflationary pressure”.

He said weak economic growth in China had probably hit Japanese trade growth and warned another rise in the consumption tax slated for next October could be a headwind.

But he added the Japanese authorities had now shown they were willing to step in if they saw any signs of weakness.

Tom Becket, chief investment officer at Psigma Investment Management, said the Bank of Japan’s move to make its easing policy “even more extreme” meant it was saying “show me your bonds and we’ll have them at any price”.

“Japanese 10-year bonds fell to an extraordinary 0.46 per cent on the news,” he said.

Mr Becket said the policies were designed to weaken the yen and make the country’s exports more attractive.

“One day doesn’t confirm a trend, but it was a short-term case of mission accomplished, as the yen collapsed by more than 2.5 per cent against the dollar,” he said.

“With the US now stopping their quantitative easing programme, markets expect this trend to continue. This would help inflation and continue to boost corporate profitability – ‘a nice little earner’.”

Marcel Thielant, Japanese economist at Capital Economics, said investors looking to enter the market should focus on sectors that rely heavily on exports, such as manufacturers.

Michael Wood-Martin, a Japanese equity manager at Henderson, said he was surprised there had not been more of a reaction to the falling yen.

“It used to be that when the yen got weak, people jumped up and down,” he said.

“When the dollar/yen rate moved from 80 to 100, people were disgruntled but accepted it. This move from 100 to about 114 has largely gone unnoticed.”

Beware currency weakness before piling into Japan, warns Greetham

The Bank of Japan stunned markets at the end of last month when it boosted its easing programme from ¥60-70trn to ¥80trn a year.

The Bank is buying Japanese government bonds but also other securities, such as real estate investment trusts, in a bid to get money moving around the economy again.

But as Fidelity’s director of asset allocation Trevor Greetham points out, investors need to be aware that a weaker yen means earnings from companies have to be high to translate into good returns in sterling.

Mr Greetham is overweight Japanese equities but underweight the yen. He said Japan was a “US-driven economy” but investors could “lose out on some of the benefits of that growing economy because of currency weakness”.

The manager said efforts by Japan to weaken its currency had been criticised in the past by neighbouring countries because a weak yen would boost Japan’s exports above other economies in the region.

“They are getting a lot of slack at the moment,” he said. “I think there is a general acceptance of their domestic aims. The Chinese may make some comment, but others will stay quiet.”