Investors weigh up a roller-coaster year for Japan

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Japan - December 2014

Japan has had mixed fortunes as an investment market this year.

The apparent success of prime minister Shinzo Abe’s first two arrows of reform started to lose their lustre in the first part of the year as some raised concerns about the implementation of structural reforms.

This, combined with the rise in Japan’s consumption tax in April from 5 per cent to 8 per cent, has meant investors have had a yo-yo approach to the Japanese market.

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For example, figures from the Investment Management Association show that in August, Japan saw net retail outflows from equity funds of £65m as investors remained uncertain about the outlook for the country. But this was reversed in September with net retail sales of equity funds for the region of £56m.

And with the unexpected boost to its quantitative and qualitative easing (QQE) programme announced at the end of October, it is likely that Japanese stockmarkets will see a further boost in popularity.

Neil Walker, portfolio manager, multi-asset strategy group at Insight Investment, notes: “Equity market volatility usually rises when markets are falling, signifying investors are moving to sell out of losing positions.

“However, Japanese equity market volatility has risen as the market has climbed, suggesting investors have been moving quickly to increase their exposure. This volatility suggests that a shift in investor positioning could still occur, meaning options strategies that incorporate a level of downside protection are more attractive than futures positions.”

Meanwhile, an interesting development that was somewhat overshadowed by the QQE announcement, was the decision by the board of Japan’s ¥127.1trn (£684bn) Government Pension Investment Fund (GPIF) to change its asset allocation.

In a statement, released the same day as the new round of QQE, the GPIF revealed it was cutting its exposure to domestic bonds, effectively Japanese government bonds, from 60 per cent of its total assets to 35 per cent.

It also confirmed its equity allocation would rise from 24 per cent of the fund to 50 per cent – split equally between domestic and international stocks – suggesting a significant amount of money could start to flow into the Japanese equity market.

Michael Woolley, client portfolio manager for Asia equity at Eastspring Investments, points out that given GPIF’s asset base, “it is worth noting that a mere 1 per cent rise in allocation to Japan equities will activate $13bn [£8.3bn] of inflows”.

He adds other potential consequences of the move by GPIF could lead to other pension funds emulating the change, adding further liquidity to the market, while individual investors might also be encouraged to invest more of their savings into risk assets.

“As Japanese households hold 53 per cent of their assets in cash [compared with 15 per cent in the US], a 1 per cent shift from household financial assets into domestic equities over the next five years implies $150bn of new funds into equities,” explains Mr Woolley.