It has been an eventful five years since Shinzo Abe was first elected Prime Minister of Japan.
Since he came to power in December 2012, he has launched an extraordinary stimulus programme that aims to break Japan’s 20-year deflationary cycle. Known as ‘Abenomics’, these reforms comprise three ‘arrows’: quantitative easing (money printing), fiscal stimulus and structural reforms.
So far, the government has gained some traction in all three areas, but there is more work to be done. Trying to change the mindset of a generation of people, who have experienced nothing but falling prices over two decades, will take time! But fresh from Mr Abe’s landslide election victory on 23 October, his party – the Liberal Democratic Party (LDP) – has been given a clear mandate to progress with Abenomics.
I view Mr Abe’s success in the recent snap election as good news for investors seeking exposure to the Japanese stock market. From an economic perspective, several indicators look positive.
Japan’s gross domestic product (GDP) grew by an annualised rate of 2.5% over the three months to the end of June, marking the sixth consecutive quarter of economic growth.
Unemployment stands at an all-time low and there has been an increase in Japan’s labour force participation rate, driven by women returning to the workplace. This happened because of changes to the tax system that encourage married women to return to work. The initiative formed part of Abe’s ‘third arrow’, which aims to improve corporate governance, raise salaries and get more people working – a vitally important trend, as there are more jobs available than people to fill them.
Japanese companies across the market spectrum appear to be benefiting from the changes that have been put in place over the past five years – and this is demonstrated by substantial improvements to corporate profitability and earnings growth during this time.
The good news is that Japanese equities look attractively valued in comparison to other developed markets. And I think there are plenty of opportunities for investors to make money in this market over the coming years; the key is to back an active fund manager with proven experience.
It is also worth remembering that Japan is a cyclical market, which means it is highly correlated to global GDP. The market swings between favouring growth and value fund managers, so it makes sense to hold a combination of funds with complementary styles.
Here, I would highlight Baillie Gifford Japanese fund, which is a good option for investors looking for a growth tilt. Manager Matthew Brett targets well-managed businesses, which have a strong competitive advantage and look attractively priced. The same team also runs several excellent Japanese equity investment trusts.
T. Rowe Price Japanese Equity is another pick in the space. Manager Archie Ciganer focuses on companies that are undergoing change and is happy to take a long-term view. It has been a strong performer since Mr Abe came to power.
Looking ahead, Mr Abe will need to overcome several obstacles to end economic stagnation. The first is inflation, which remains subdued. In September, core consumer price inflation rose 0.7%, in line with the previous month’s increase. This remains some way off the Bank of Japan’s 2% inflation target. Meanwhile, the country’s low birth rate and ageing population represents another challenge to economic growth.
Despite the headwinds, I feel excited when I think about the path ahead for Japan. I think Mr Abe, five years in power and armed with a fresh mandate, will succeed in driving further positive change. Japan warrants a long-term allocation.
Darius McDermott is managing director at Chelsea Financial Services and FundCalibre
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Mr McDermott’s views are his own and do not constitute financial advice.