Why your clients need to be patient with Japan

  • To learn about the basics of Abenomics
  • To understand the effect of Japanese policy on the yen
  • To grasp an understanding of how equity markets react to fiscal policy in Japan

In this regard, the strength of the yen... immediately after the BoJ’s new “yield control” and “inflation overshooting” policies will be of concern to Japan’s policymakers.

"It cannot be ruled out that the BoJ is being forced to pretend and extend policies which, had they been as effective as anticipated, would now be in the process of being wound down.”

Mr George is not alone in his stinging attack on the BoJ’s interventionist approach. Tom Becket, chief investment officer at Psigma, also reckons investors have every right to be frustrated with “plain random” measures that failed to achieve what they set out to do.

“Investors believe that the Bank of Japan’s experiment has failed and credibility in them has collapsed,” he says. “The yen has been unhelpfully strengthening and there is an argument that despite owning a terrifying amount of the bond market, they have lost control of the ‘long end’, judging by the rise of long-dated borrowing costs.

“The more recent decisions made in 2016 have seemed poorly thought out and plain random, particularly when the BoJ cut their deposit rate to -0.10 per cent, despite Kuroda-san [the BoJ’s governor] denying that he had contemplated such an action only a few days previously.”

With crisis comes opportunity

Such comments might seem enough to put anyone off investing in Japanese equities. Yet Mr Becket, influenced by the effect negative sentiment has had on valuations, contends that the action of central bankers shouldn’t undermine the merits of investing in a country now full of seemingly cheap stocks.

A closer look at the constituents of the Nikkei 225 index makes this temptation to buy on weakness understandable.

Despite horrid memories of its real estate and stock market collapse in the early 1990s, and uninspiring growth forecast today, few can dismiss the nation’s reputation for creating some of the world’s most famous companies and market-leading brands. 

The likes of world-renowned companies such as Sony, Mitsubishi, Toyota, Honda, Panasonic and Nissan are all largely synonymous with quality and, perhaps more importantly, decades of success when their domestic economy was stuttering and technology rapidly evolved.

Given that Japan is capable of breeding those types of names means, according to respondents to this article, that the country's reputation for cutting-edge innovation and shrewd management should not be discredited.

Naturally, recent external events, such as Brexit’s effect on foreign exchange markets and the economic slowdowns of its biggest trading partners North America and China, do not make such credentials immune from hardship.

However, some analysts are now convinced that these challenges have been priced into most valuations.

“The yen’s appreciation and relentless stream of global growth revisions downward forced top-down forecasters to expect a profit drop of around 10 per cent for the current financial year,” says Jesper Koll, chief executive at WisdomTree Japan.