Talking PointNov 17 2016

Trump bodes well for Japan

twitter-iconfacebook-iconlinkedin-iconmail-iconprint-icon
Search supported by
Trump bodes well for Japan

Japan's economy could be given a significant boost by a US-Japan alliance, analysts have predicted.

According to Jesper Koll, head of Japan for ETF provider WisdomTree, the meeting on 17 November of Japan's Prime Minister Shinzo Abe with Donald Trump, the President-Elect, is likely to "underscore" a strong alliance.

This is likely to have a "positive implication for US-Japan economic and financial relations", Mr Koll said.

He explained there are many similarities between Mr Abe and Mr Trump, not least the fact "both men have more or less explicitly build their popular support at least in part by trying to stand up to the rise of China".

Mr Koll said: "Team Abe has deep-rooted connections to the Republican Party. Barely a year in power, in September 2013, Mr Abe became the first non-American to be awarded the Herman Kahn Award from the conservative Hudson Institute.

Japan has many innovative companies that are capable of growing despite the sluggish economy. James Carthew

"Within hours after the US election result was confirmed, Team Abe worked overtime to secure a meeting with the President-elect. Securing the first high-profile global leader meeting is poised to have many advantages.

"Mr Abe’s first-mover visit will give the President-elect a high-profile chance to look Presidential on the global stage. The US-Japan economic and security relationship will mark the start of Trump’s global leadership."

He added that as "Team Abe" has an excellent track-record of promoting direct foreign investment by industrial Japan.

"It is not unreasonable, in our view, to foresee a commitment to build added US factories and raise Japan’s investment into America as a result of this meeting."

It is not just international politics and possible alliances that have boosted Japan in recent days; a weak Yen has also benefited Japan's exporters, and helped to bolster the country's GDP figures, according to Katsunori Kitakura, lead strategist at SuMi Trust.

The third quarter 2016 preliminary GDP results outstripped the 0.8 per cent market forecast, with more than 2.2 per cent annualised growth.

This was largely due to stronger than expected export growth. Mr Kitakura said: "Mr Trump’s election victory and the ensuing weak yen have created a sense of relief for exporters, while strong GDP figures for Q3 2016 have also added to market optimism. 

“External demand has been a key contributor to growth during the quarter with exports up 2.0 per cent year on year.

"The BOJ’s decision to not lower interest rates further into negative territory, combined with speculation over a Fed rate hike in December, saw exports rise during July to September, as any appreciation of the yen was halted.

“For the remainder of the year, exporters will continue to be the key growth driver. Trump’s policies are likely to be inflationary and should accelerate the rise in interest rates.

"As a result, the yen will weaken against a stronger dollar, and will provide an improved earnings outlook for this sector. We see a weaker yen/stronger dollar, trading in a range of 104-109 until year end. Should the yen continue to depreciate, export  oriented stocks will outperform domestic demand-related stocks.”

Economic tie-ups and currency conundrums aside, James Carthew, research director for QuotedData claimed the implications for Yen risk-asset markets are "poised to be positive".

Mr Carthew said: "One the face of it the Japanese economic environment seems to be taking a turn for the better with a surprise 2.2 per cent annualised growth in GDP for Q3 2016.

"However the headline figures may be misleading as domestic demand remains in the doldrums and experts warned a jump in exports may be down to one-off factors.

"But currency is only one part of the Japanese story", he said, adding: "Initiatives such as corporate governance reforms and efforts to increase female participation in the workforce are helping and Japan has many innovative companies that are capable of growing despite the sluggish economy."

According to Mr Carthew, funds which are focused on the small and-mid cap are of the Japanese market will benefit from pricing anomalies in the equity market. 

He commented: "Fidelity Japanese Values is focused on the small and mid cap area of the Japanese market and researching this area is no easy feat, which is helped by Fidelity’s research capabilities on the ground. This allows the portfolio to derive attractive returns from more niche opportunities.

"The manager, Nick Price, aims to identify companies that are growing, but whose growth is not reflected in their valuation. Such valuation anomalies, Price says, can occur for a number of reasons but often the companies will be misunderstood by investors because they are not well-researched.

Find out more

FTAdviser's latest guide is on Japanese equities and qualifies for 60 minutes' worth of CPD. Click here.