Quantcast
Menu
Save, make, understand money

Investing

Japan’s revival: Will ‘Abenomics’ lift the economy further in 2014?

Joanna Faith
Written By:
Joanna Faith
Posted:
Updated:
16/01/2014

The average Japan investment trust is up 46% over one year, according to the Association of Investment Companies.

Japan’s stock market turned a corner last year, more than two decades after its stock and real estate bubble burst, thrusting its economy into a long, drawn out financial crisis and sending foreign investors fleeing for the hills.

The Nikkei 225 index is up almost 50% year-to-date, with the country’s Prime Minster of just over a year, Shinzo Abe, widely credited with turning Japan’s economy around with his aggressive fiscal policies, commonly referred to as ‘Abenomics’.

Notably, investment trusts in the Japan and Japanese Smaller Companies sectors have dominated the performance tables over the last 12 months.

According to analysis from the Association of Investment Companies (AIC), while the average investment trust is up 15% over one year to 31 December 2013, the Japan sector is up 46% and the Japanese Smaller Companies sector up 34% over the same period.

Three year figures are positive too, with the Japan and Japanese Smaller Companies sectors each outperforming the average investment trust by 21 and 23 percentage points respectively.

Discounts on Japan trusts have also narrowed substantially, meaning they are more expensive to invest in, reflecting increased confidence in the sector. The average Japan trust is now on a 4% discount compared to a 10% discount a year ago.

But will Japan’s success continue in 2014?

“The outlook for 2014 remains good. While many commentators question the sustainability of the uplift from Abenomics, with doubts centred on the ‘third arrow’ of structural reform, we feel these doubts are overplayed,” says Nicholas Weindling, manager of the JPMorgan Japanese Investment Trust.

“In fact there is significant structural reform already in play. One development that we have already seen has been the decision by Japan to enter negotiations to join the Trans-Pacific Partnership free trade area.

“We believe this is a very significant personal achievement of Prime Minister Abe, who has overcome objections from farmers and other protectionist groups that had prevented his predecessors from entering free trade negotiations.”

Kwok Chern-Yeh, manager of the Aberdeen Japan Investment Trust is slightly less sanguine, saying “the jury is out” on whether Abe will fully implement his reforms in the face of “vested interests”.

He is also cautious around the rise in the rate of sales tax to 8% from 1 April next year, from the current 5%.

“One worry in the short-term is that discretionary spending will fall after the tax has been implemented, although the government is hoping to cushion the short-term impact with a ¥5.5trn stimulus package. But, if Abe succeeds in boosting growth, consumers will likely increase their spending when the economy is doing well.”

However, he says there is more to the Japan story than ‘Abenomics’: “Japan is home to numerous great companies, many of which are global leaders in their respective industries, and have shown remarkable adaptability through years of stagnation”

In terms of where to invest, Weindling favours companies that are geared to take advantage of economic recovery and demographic change, rather than the monolithic household names such as Sony or Canon, which, he says have lost out to cheaper overseas competitors and are now in many cases market leaders in products that nobody wants.

“We own the number one e-commerce company in Japan called Rakuten, which should benefit from rising consumer adoption of e-commerce.

“We also own Kakaku.com, a leading price comparison and table booking website in Tokyo. The stock has outperformed the market by 92pc in the last year. We also own the company Cookpad, an online collective recipe website used by many Japanese to exchange cooking notes and ideas,” Weindling says.

Share price total return on £100 lump sum in Japan sectors at 31 December 2013

  1 year 3 years 5 years 10 years
Overall Weighted Average ex VCTs 115.08 121.33 205.82 272.89
Weighted Average Japan 145.98 142.06 192.27 166.53
Weighted Average Japanese Smaller Companies 133.92 143.94 193.11 139.37
Aberdeen Japan 105.37 114.14 217.99 262.69
Baillie Gifford Japan 172.07 182.05 251.5 268.83
JPMorgan Japanese 143.84 132.57 173.06 135.68
Schroder Japan Growth 138.31 136.01 179.7 172.16
Atlantis Japan Growth 129.77 146.73 184.3 164.69
Baillie Gifford Shin Nippon 150.07 187.12 321.93 246.41
Fidelity Japanese Values 134.57 121.36 166.42 136.24
JPMorgan Japan Smaller Companies 135.4 133.77 131.95 92.36
Prospect Japan 115.48 127.73 283.77 91.27

Source: The AIC