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Written by: Darius McDermott
03/08/2018
Japan's economy has taken almost 30 years to recover from its asset price collapse and subsequent deflation. It wasn't until prime minister Shinzo Abe came to power six years ago that things started to change.

From 1989 when the asset price bubble burst, up until Abe’s latest election in December 2012, the Japanese equity index fell by 27.05% in sterling terms while global equities were up an average of 318.85%. From Abe’s election to now, global and Japanese equities are roughly level-pegging, with the Topix up 120.05% in sterling terms.

Abe has been steadily rolling out his huge economic reform plan – Abenomics. Essentially, it consists of three ‘arrows’:

  • Monetary easing – increasing money supply
  • Fiscal stimulus – more government spending
  • Structural reforms – for instance, rolling out new gender equality laws to increase the number of women in the workplace, improving companies’ corporate governance, encouraging firms to pay out more dividends to shareholders and lowering corporate taxes.

And yet, from what I’ve noticed, Japan seems to have fallen off investors’ radars of late, perhaps while they are preoccupied with ongoing Brexit uncertainty and trade war tensions between the US and China.

Ways to gain exposure to Japan

In my view, I think it pays to hold a small portion of Japanese equities in your portfolio. Abenomics seems to have been effective so far and is set to continue. Japan is also the ‘last man standing’ in terms of supporting its bond market through quantitative easing, while other economies such as the US, the UK and Europe are tapering their own QE programmes. This should provide extra support for both the economy and the market.

One Japanese equity fund we like is Schroder Tokyo, which is headed up by Andrew Rose. It was launched near the peak of the Japanese asset price bubble and, in its thirty-year lifetime, it has only had two managers. This means Rose and his team have a wealth of experience – both during rough times and smooth times – when it comes to investing in the Japanese market. Rose, helped by an on-the ground team in Tokyo, has a cautious approach to stock selection which centres on finding the highest quality companies available.

Alternatively, we like T. Rowe Price Japanese Equity, which will hold a relatively large number of stocks at any one time – usually between 60 and 100 – and these can be of all sizes. However, the fund tends to have a bias towards small-caps. This is because manager Archie Ciganer looks for undervalued companies with strong brands or cutting-edge technology, which he tends to find among the smaller companies.

Investors may also wish to opt for an investment trust rather than a fund, which is publicly listed on the Stock Exchange. It can borrow money during times when the manager is seeing lots of opportunities, and can hold up to 15% of its income per year to give back to investors during times of difficulty.

In this space, we like the Baillie Gifford Shin Nippon trust, which also has a focus on smaller companies. Shin Nippon means ‘new Japan’ and so, as the trust’s name suggests, manager Praveen Kumar turns his attention to market areas which are either emerging or being disrupted.

To summarise, I think Japan is in danger of being a little overlooked by investors at the moment. With measures in place to tackle labour shortage, rising company dividends, improving wage growth, and many more of Abe’s reforms still to come, we think it’s prudent to have at least some exposure as part of a diversified portfolio.

Darius McDermott is managing director of FundCalibre

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