Japan prepares new experiments as global headwinds draw near

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Investing in Japan - October 2016

Japan prepares new experiments as global headwinds draw near

Japan has seen a resurgence in recent years thanks to the re-election of prime minister Shinzo Abe in 2012 and the subsequent reforms and monetary policy experiments.

Almost four years after the start of so-called Abenomics, the experiment is continuing with mixed success. Figures from FE Analytics show that in the period between Mr Abe being elected in December 2012 and September 21 2016, the MSCI Japan index gained 75.9 per cent in sterling terms. This is ahead of the MSCI World index, which climbed 72.8 per cent in the same period, while the MSCI AC Asia ex Japan index recorded a much lower rise of 39.2 per cent.

Equity performance overall has therefore improved, but CPI inflation is hovering around 0 per cent, still well short of the 2 per cent target. This year has already seen more drastic moves from the Bank of Japan, including moving interest rates into negative territory, while the September meeting led to the introduction of “yield curve control” as it attempts to target inflation of above 2 per cent “in a more forceful manner”.

Markets moved higher in the wake of the latest central bank action, with the Nikkei 225 index gaining almost 2 per cent, but is it a turning point?

Patrick Connolly, certified financial planner at Chase de Vere, points out: “The Nikkei 225 index peaked at nearly 39,000 points in December 1989 and since then has experienced many false dawns. The index currently stands at just 16,729 [September 13 2016], which is a staggering decline over more than 26 years.”

But he adds: “[Mr] Abe has ushered in a programme of economic stimulus to try and boost the Japanese economy. With his ‘three arrow’ approach he has implemented a government spending package, targeted inflation of 2 per cent through printing money in a bid to end regular periods of deflation, and launched a programme of business reforms.

“This is the first credible attempt to tackle Japan’s structural problems in the past 25 years, although you could be forgiven for thinking that it isn’t working yet. This is one of the reasons why Mr Abe’s popularity has waned in recent times.”

A lack of investor confidence could be one reason behind the outflows from the region, with the IA Japan sector recording net retail outflows in each of the five months to the end of July. But Yu-Ming Wang, global head of investment and chief investment officer, international, at Nikko Asset Management, suggests one of global investors’ common concerns – a high level of sovereign indebtedness – may be less relevant in this case.

“Japan’s national wealth largely resides in the household and corporate sectors, which makes the government’s heavy debt less of a concern,” he says. “It also means that Japan is much less vulnerable to the sort of capital flight by offshore investors that often triggers financial crises.”