JapanOct 27 2016

Investment insight: Japan

  • Gain an understanding of the current economic factors facing Japan
  • Grasp the relationship between market performance and currency movements
  • Understand the challenges ahead
  • Gain an understanding of the current economic factors facing Japan
  • Grasp the relationship between market performance and currency movements
  • Understand the challenges ahead
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Approx.30min
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CPD
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Investment insight: Japan

The Lindsell Train Japanese Equity fund has perhaps delivered the most consistent approach, producing positive returns in each of the past five years. However, performance prior to this was less successful, as the fund has only averaged 3.1 per cent per annum over the past 10 years compared to the sector average of 5.2 per cent.

When analysing the average performance of the Japanese funds, it is clear that the sector as a whole has had a good run over the past half-decade. This has largely been a result of high growth in 2012-12 and 2015-16, where currency strength helped boost the average return for UK investors to 34.4 and 33 per cent, respectively. 

Other years have seen a mixture of small increases and losses, but none of the funds listed have experienced any unmitigated disasters.

Challenges ahead

Looking ahead, the challenges are numerous. The Japanese central bank has just introduced a new package of measures aimed at raising inflation and therefore weakening the yen, and this would be bad news for investors who have reaped the benefits of its rise in recent years. 

A further problem is the rather staid nature of many of Japan’s largest firms. But the government is attempting to encourage innovation and shareholder-friendly policies, which, if successful, would be rather more welcome for investors.

Declining population

An ageing population is one of the most significant structural challenges facing Japan, and the government has unveiled a relatively unorthodox way of dealing with the problem. The paradox of desperately trying to increase female presence in the workplace, while also halting a declining birth rate, has left prime minister Abe with a difficult problem to solve. 

Part of the government’s solution has been for it to organise ‘marriage hunting’ events in order to bring people together. Data provided by World Bank emphasises the importance of addressing these issues before they become more problematic.

The population of Japan has fallen every year since 2011, prompting huge concerns about the best way to arrest this slide. This desperate need to increase the population is also a significant factor to the plight of the Japanese economy. 

In 2012, GDP stood at $6trn (£4.9trn), but by 2015 this had plummeted to $4.1trn (£3.34trn). To compound these difficulties, public debt has rocketed to 250 per cent of GDP and increased every year since 2007. As of December 2015, Japan had the worst public debt to GDP ratio in the world.

Currency

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