You are here: Home - Blog -

BLOG: Why the case for investing in Japan remains strong

Written by: Darius McDermott, managing director of Chelsea Financial Services
We have been backing Japanese equities for the past two or three years, since Prime Minister Abe’s “three arrows” of fiscal stimulus, monetary easing and structural reforms began.

Arrows one and two have proved effective and, after decades of false dawns, a stimulus-pumped Japanese equity market has finally started to deliver strong returns.

Since the start of the year, Japanese stocks overall have gained 18 per cent in yen terms, and in April the Nikkei 225 Stock Average closed above 20,000 for the first time in 15 years. The broader Topix index also reached its highest level since November 2007. So does that mean it is time to sell? I think not. If anything, Japan is more interesting today than it was a year ago. Like the JPM Japan fund managers, I’m quite bullish, as there are a lot of positives coming together at the same time.

While the market has enjoyed strong gains, it is still not expensive, and the price to book ratio, which set a record low in 2009, remains at historically low levels. This means there are still good pockets of value to be found. For example, there are some great opportunities in the financials sector, which has now surpassed the gold bear market of 1981 to 2003, representing one of the great bear runs for a main asset class. As a result, the Elite Rated GLG Japan Core Alpha fund now holds a significant overweight in banks: 23.5 per cent versus an 8.9 per cent weighting in the benchmark. The yen is also at a 40-year low.

It’s also worth remembering that the third arrow, structural reform, is not one big policy but actually lots of little ones and will take time to implement. Now is not the time to lose patience. In the meantime, there are other positive factors which could lead to the market continuing to do well: stable politics for the first time in a long time; the central bank is desperate to get achieve sustainable inflation; unemployment is now 3.4 per cent so wages are finally rising (the big banks have increased wages for the first time in two decades!); earnings momentum is way ahead of anywhere else in the developed world and two codes have been introduced – stewardship in February 2014 and Corporate Governance next month.

David Coombs, manager of the Rathbone Multi Asset Portfolios is of the same mind, having recently moved to an overweight position in Japan. Abenomics aside, David has been looking at whether improvements in corporate governance (including the introduction of the new code) which has long been an issue, are going to drive a re-rating of the Japanese market.

Today more than 70 per cent of the Tokyo Stock Exchange (TSE) companies have an external director, compared with 50 per cent just five years ago. This could potentially drive a redistribution of cash to shareholders, and perhaps steer households into stocks. There is clearly pent up demand, with cash representing around 53 per cent of household assets. That figure is closer to 75 per cent for 30 to 39 year olds. Alex Treves, head of equities for Japan at Fidelity Worldwide Investment, who shares this view on corporate governance improvements, believes the market has underestimated the progress made in this area.

Some external risks remain, such as concerns about a cyclical downturn in US activity, the deflationary threat in the eurozone, and a hard landing scenario in China. However, investors hungry for diversification, may be interested to learn that Japan has, over the past three years, had the lowest correlation with global equities of any of the major developed markets.

The coordinated pro-growth policies, the changes in corporate behaviour that are occurring, and the fact it offers reasonable valuations in a global context all continue to support the case for Japan in my view. While there may yet be some near-term corrections, they could simply provide investors with good opportunities to increase their exposure to Japanese equities.


There are 0 Comment(s)

If you wish to comment without signing in, click your cursor in the top box and tick the 'Sign in as a guest' box at the bottom.

Your right to a refund if travel is affected by train strikes

There have been a wave of train strikes in the past six months, and for anyone travelling today Friday 3 Febru...

Could you save money with a social broadband tariff?

Two-thirds of low-income households are unaware they could be saving on broadband, according to Uswitch.

How to help others and donate to food banks this winter

This winter is expected to be the most challenging yet for the food bank network as soaring costs push more pe...

What will happen if rates change

How your finances will be impacted by a rise in interest rates.

Regular Savings Calculator

Small regular contributions can build up nicely over time.

Online Savings Calculator

Work out how your online savings can build over time.

DIY investors: 10 common mistakes to avoid

For those without the help and experience of an adviser, here are 10 common DIY investor mistakes to avoid.

Mortgage down-valuations: Tips to avoid pulling out of a house sale

Down-valuations are on the rise. So, what does it mean for home buyers, and what can you do?

Five tips for surviving a bear market mauling

The S&P 500 has slipped into bear market territory and for UK investors, the FTSE 250 is also on the edge. Her...

Money Tips of the Week