Bill Jamieson: Brave Martin Currie sails into a new Japan storm

Published on Monday 30 August 2010 15:37

There are brave souls at Edinburgh-based investment house Martin Currie. But when your investment specialism is Asia, and Japan in particular, you need all the bravery you can muster.

Earlier this month the firm launched a major drive to encourage investors to think more positively about a country that has suffered two "lost decades" of growth, caused investors to lose shedloads of money and has seen a succession of promising new dawns all turn into darkness at noon.

Domestic demand has been stymied for years due to a banking system clogged with bad debt, long delays in grasping the need for bank reform, an ageing population and marked aversion to risk after the asset price collapse of the early 1990s.

But there surely comes a time when bad news has to end, even for Japan. And since the art of investment is buying at the bottom, or near the bottom, Martin Currie was offering a contrarian view of the type investors should not lightly ignore. Its 20-page brochure from Keith Donaldson, head of its Japan team, was entitled: Japan - a New Perspective.

Its central points are that Japan's manufacturers have shifted focus to the world's fastest growing economies - exports to China in particular; the country is home to some of the world's strongest and most innovative companies; and this year Japan will spend 3.4 per cent of its GDP on research and development - by far the highest of any developed country. It's not the macro economic environment that most matters for investors - the linkage between GDP growth and stock market performance is tenuous - but the strength and quality of individual companies.

It is a well-argued view. Unfortunately, it marked the onset of a deluge of even more bad news. Figures showing economic growth of just 0.4 per cent in the second quarter came with IMF projections that by the end of 2010 China will have replaced Japan as the world's second largest economy.

A further investor exit from the dollar pushed the yen to a 15-month high, threatening to snuff out the country's hopes of an export-led recovery. The bet that exporters made earlier this year was that the yen would stay at around 90 to the dollar. Instead it has risen to 83, biting deeply into their profit margins.

Shares in Tokyo tumbled, with the Nikkei 225 falling below the psychologically important 9,000 level.

Undeterred, Martin Currie put out a precis of its earlier investor note, this time headed: Our Eyes are open to Japan. Are Yours? But it seems eyes have been open to Japan in a quite different way. As the currency crisis deepened, the governor of the Bank of Japan, Masaaki Shirakawa, returned a day earlier than planned from a meeting of central bankers at Jackson Hole, Wyoming to try and halt further yen appreciation.

Yesterday, after an emergency meeting, the Bank of Japan announced it would be increasing lending to commercial banks by 10 trillion (75 billion).

The government then announced its own plans for a 920bn yen stimulus package to help revive domestic demand, ease upward pressure on the currency and prevent a further slide into deflation. But markets - so far - are not overjoyed. In particular the move by the central bank is seen as little more than a show of willingness. The markets appeared unimpressed by the BOJ's actions. The yen continued to rise against major currencies, though the Nikkei 225 gained 1.8 per cent.

The critical test of the credibility of official action will come over the next few days. Is this the sum total of the official response? Or will further action follow? And the test will have a resonance wider than Martin Currie's Japan mutual funds and investment trusts.

Consider what Japan has just done. Central bank monetary easing and yet another government stimulus package: do these not have an ominously familiar ring? Are these not the very same solutions being urged here and in the US to see off the twin threats of "double dip" recession and deflation?

Clearly it is not just quantitative action, but the environment and culture in which they are announced that can make a bigger difference to their success than so far realised.