Should Japan be on your Christmas wish list?

My children’s Christmas list has been growing at an exponential rate, so I’m rather glad that it has now been ‘posted’ to Santa.

Speaking of the man in the red and white suit, markets could be in the middle of a ‘Santa rally’ right now, but I rather doubt it.

I certainly don’t think we’ll wake up on Christmas morning with the FTSE back up above 7000. October was a very good month and the UK stockmarket bounced back by about 10% from its low in the summer – so I don’t think there is that much more to come for now.

We are all waiting with bated breath to see if the US Federal Reserve raises interest rates before the year is out, so it might be Janet Yellen (chair of the board of governors at the Fed) who makes or breaks the festive season for investors.

It’s also the time of year when I’m asked to look into my crystal ball and predict which asset class will do well the following year. For the past three years, one of my punts has been Japan and, by chance, it hasn’t been a bad tip.

Over three years, Japanese Smaller Companies is the best performing sector – up 58.81%, with the broader Japan sector in seventh place up 52.65%. Over one year, Japan is in third place up 15%, and Japanese Smaller Companies close behind in fourth, up 12.99%*.

It’s now three years since the start of Abenomics, however, so is the story still a good one? Prime Minister Shinzo Abe’s economic policy famously consisted of ‘three arrows’: fiscal stimulus, monetary easing and structural reforms.

His first and second arrows were generally heralded a success. A prolonged period of inflation came back into the economy for the first time in two decades and corporate profitability improved. However, his third arrow – structural reform – is causing some concern.

What critics are forgetting is that this is not a single reform but many, and they would never happen overnight. Japanese companies need to be sure that the improvements are here to stay and not a temporary phenomenon – a mindset of 20 years is hard to change.

Yes, there has been a dip back into deflation but oil price falls have a part to play in this and when you strip these out, other prices are actually still rising.


Japanese companies are also becoming more shareholder- friendly, as pointed out by Neptune Investment Management: Japan has long had the ability to pay much higher dividends but it just has not had the incentive.

Around ¥80 trillion or £500 billion worth of cash is sitting on the balance sheets of the 1,800 companies that make up the Japanese stockmarket. According to Neptune, now that the two critical components of willingness and ability have been married together, it sets the scene for the strongest dividend growth outlook among developed markets. Japan is no longer just a play on quantitative easing but has a truly exciting company-led investment case, too. I tend to agree.

If you are of the same mind, Elite Rated Japanese equity funds we currently like include Baillie Gifford Japanese, Neptune Japan Opportunities and Schroder Tokyo.

*Source: FE Analytics to 9 November 2015. Comparison with all Investment Association sectors.