The package of measures, generally referred to as ‘Abenomics’, aims to provide fiscal and monetary stimulus to the economy, as well as ushering in a number of structural changes. And although critics argue progress has been slow, they remain broadly optimistic that Japan is on course to become a far more attractive prospect for investors over the coming years.
Ed Smith, asset allocation strategist at Rathbones, insists that Prime Minister Abe’s focus on corporate reforms has already made companies more shareholder-friendly.
“I don’t think Abenomics has been an outright success yet, but you wouldn’t expect it to be so soon,” he says. “It was always going to be a long-term game to get Japan out of 20 years of a deflationary environment.”
The introduction of Abenomics is the latest chapter in the story of this remarkable country, which still manages to combine ancient traditions with high levels of technological achievement. Countless column inches have been dedicated to the burning question of whether or not Japan has truly turned a corner, but flashes of optimism have been dwarfed by troubled periods that have hurt investors.
The Japanese stock market’s ups and downs over the past 25 years illustrate the point. The Nikkei 225 index, which represents the Tokyo stock market, peaked at nearly 39,000 points at the end of 1989 but it’s been a rollercoaster ride ever since.
It’s a similar story over the past year, during which time it has been close to 21,000 points at its best and as low as 14,865 at its worst. It’s now just below 17,000, although the jury is out on where it goes next.
The Japanese may have a legendary work ethic but until recently its economy had spent many years in the gloom. Mark Dampier, head of research at Hargreaves Lansdown, says: “Persistent deflation, or falling prices, meant consumers were unwilling to spend, while a strong Yen made Japanese exports more expensive for foreign buyers. This was a difficult environment for many Japanese companies and their share prices suffered as a result.”
Although investors are feeling more positive on the back of government plans to boost economic growth, increase inflation and weaken the Yen, time will tell whether these measures will be successful over the long term.
Adrian Lowcock, head of investing at AXA Wealth, believes you can make money from Japan but insists you need to choose wisely. The managers that enjoy success, he argues, are those that are able to scour attractive opportunities.
“Japanese large companies have benefitted from a weaker Yen as this helps with their exports but to some extent this has now played out,” he says. “There’s a value opportunity in Japan, but it’s just about being a bit more selective.
“As exporters, Japan’s large companies will be much more sensitive to global economic weakness, particularly towards China’s economic data,” he says. “In contrast, Japanese smaller companies have been outperforming.”
The statistics back up his point. IA Japanese Smaller Companies has been the best performing sector over the past year with an increase of 13%, according to Morningstar data to 18 May 2016. IA Japan, which includes funds that have a focus on larger companies, meanwhile, is down slightly at -0.73% over the same time period.
However, there are only a relative handful of funds in IA Japanese Smaller Companies, which is for funds investing at least 80% of their assets in companies from the bottom 30% by market capitalisation. Returns from these funds have differed widely over the past year so you need to choose carefully.
Andrew Merricks, head of investing at Skerritts Consultants, says: “The reforms are more about the domestic market, so consequently the value has been in the small and mid cap end of the market.” However, he says that he’d be cautious about investing more money in the Japanese smaller companies sector because it has already done so well.
Over the next few years, Kwok Chern-Yeh, head of Japanese Equities at Aberdeen Asset Management, is confident that there will be plenty of opportunities for investors to make money. “There’s been a lot of talk about the problems facing Japan but the country’s best companies have adapted and are set to do well regardless of whether Abenomics succeeds or not,” he says.
Many of the best companies, he points out, have relocated their manufacturing to lower-cost countries, being among the first multinationals to exploit the benefits of globalisation – years before the term became ubiquitous. “Some companies have been expanding overseas revenues for some time,” he adds. “This allows firms to benefit from growth in other parts of the world, especially fast-growing emerging markets where middle class affluence is driving demand.”
One to watch: Schroder Tokyo fund
The Schroder Tokyo fund aims to grow investors’ money by participating in the growth of the Japanese economy – with a particular focus on its manufacturing industry and sectors benefiting from structural change in the economy.
Its manager, Andrew Rose, is experienced and has enjoyed impressive levels of outperformance, according to Mark Dampier, head of research at Hargreaves Lansdown.
“He was instrumental in developing the strategy, which has been used on the fund since 1989, and he officially took over as manager in 2004,” he says. “This fund may appeal to investors looking for core exposure to Japanese equities.”
Although the fund invests in a variety of sectors, the most prominent include electrical appliances, transport equipment, the retail trade, and chemicals.
Its 10 largest holdings include prominent international names such as Toyota Motor, Bridgestone, East Japan Railway, TDK, Mitsui and Japan Airlines.
Mr Rose, who joined Schroders as a Japanese equity analyst in 1981, is based in London but was previously head of Japanese Equities in Tokyo from 2001 until 2006. He holds a degree in Japanese & Politics from the University of Sheffield, and a postgraduate degree in International Economics from Kobe University, Japan.