Comment: The sun hasn’t set on Japan for investors

Bill Jamieson. Picture: Ian Rutherford
Bill Jamieson. Picture: Ian Rutherford
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A few weeks ago I was putting the finishing touches to a presentation on the global economic outlook when I discovered to my horror that I had omitted any reference to the world’s third-largest economy, Japan.

The omission was all the more glaring given everything that has been written over the past two years on the startling changes in fiscal and monetary policy introduced by prime minister Shinzo Abe.

“Abenomics” – and the high hopes it inspired that Japan might break out of a 20-year stagnation torpor – sent the Nikkei 225 Index soaring from 8,365 in July of 2012 to 15,908 in January this year, a rise of 90 per cent.

But it seems I am not the only one for whom Japan has fallen off the radar. When I checked on the BBC news website for an update on recent performance of the Nikkei, I was surprised to find that it no longer covers this market on its business front page.

A quarter of a century ago, Japan was the overseas market of choice for millions of Western investors. Few noticed how absurdly over-valued it had become while attention was hypnotised by relentless upward progression. Then came the crash. And almost overnight, investing in Japan – with all its electronic and technological successes – lost its attractions.

So how do prospects look now? For the record, the Nikkei 225 fell back 2.1 per cent last week to just over 15,000 points on concerns that, despite all the efforts at stimulus, the core rate of inflation had fallen to 1.4 per cent.

Tokyo has been one of the worst performing markets since January. There is a worrying sense that Abenomics is failing to work the magic many expected of it. A particularly sober analysis has come this month from the economist Charles Dumas at Lombard Street Research.

He wrote that Japan’s dismal export performance has undermined its recovery potential; Abenomics has produced only a temporary growth spurt and has worsened already-weak household incomes; without further major devaluation, inflation will relapse to zero or turn into deflation.

He said: “With major devaluation, the risk of financial crisis could be acute within three to five years. Only with fiscal measures to extract excessive cash directly from corporations can this ‘lose-lose’ choice be avoided.”

However, not all are so despairing. An assessment in the current edition of the Economist suggests that after the first two arrows of Abenomics – the huge fiscal stimulus and monetary easing – a third arrow was fired last week: structural reforms to unleash growth. This is by far the most politically difficult and faces entrenched resistance from vested interests. But a combination of an ageing workforce, sluggish growth and the rise of China as an economic power are now widely accepted by Japanese voters as making a compelling case for change.

There has also been speculation that the Japanese state pension fund has been buying equities, absorbing the foreign selling of stock built up in the bull run of last year. The aim is to encourage Japan’s leading quoted companies to return money to investors – a powerful driver of US stock performance in recent years.

Tim Gregory, head of global equities at Psigma Investment Management, said this could “help drive the powerful re-rating of the Japanese market that we still strongly believe is possible in the coming years”.

He added that Japanese macro data may not be as bad as the bears fear. Indeed, first-quarter GDP data was actually revised to a higher level than originally announced, driven by an increase in business investment. And in recent weeks Japan has recovered more than half of this year’s losses.

For investors prepared to take a longer-term view, the pull-back may provide an opportunity to slip money into a Japanese investment trust.

Leading the pack is the £349 million JP Morgan Japanese Investment Trust. The share price has barely moved over the past year – just 0.2 per cent against an overall 6.8 per cent rise in Japanese equities, and it has also underperformed over five years – up 73.9 per cent against a 101 per cent rise in the Tokyo market. The shares at 216.7p yield 1.29 per cent and stand on a discount to net assets of 10.3 per cent.

The £247m Baillie Gifford Japan Trust has fared better, with an 11.4 per cent gain over the past 12 months and a stonking 156 per cent over five years. But the shares at 359.6p reflect this performance and are standing at a 2.2 per cent premium to net assets.

Finally, there is Aberdeen Japan Investment Trust, at 365p standing on a discount of 9.1 per cent. It is up 6.9 per cent over 12 months and 90.3 per cent over five years. The shares at 365p stand on a discount of 9.1 per cent.