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‘Strong and stable’ Japan finally breaks deflationary cycle

‘Strong and stable’ Japan finally breaks deflationary cycle

Japan’s programme of sweeping reforms, known as ‘Abenomics’, is finally starting to break the 20-year deflationary grip on the economy, according to Baillie Gifford Japan Trust (BGFD) manager Sarah Whitley.

Abenomics, named after prime minister Shinzo Abe who came to power in December 2012, comprises of three parts: quantitative easing or rather money printing, fiscal stimulus and structural reforms. The latter includes attempts to overhaul what had been an inflexible labour market and improve corporate governance.

Four-and-a-half years since Abe set about stimulating Japan’s economy, he has shown himself to be a safe pair of hands. During the first three months of 2017, its economy grew by 2.2%, up from 1.4% the previous quarter. Meanwhile, core consumer inflation rose 0.3% in April.

‘If you want strong and stable government, I can tell you where to find it,’ she joked.

Corporate confidence

As economic growth continues to improve, Whitley points to improved confidence at a corporate level. For example, companies starting to offer part-time workers full-time contracts. These positive trends in the employment market suggest the ‘output gap’, where the actual output of an economy falls short of its potential, has disappeared.

‘Probably the most important thing changing Japan at the moment is the labour market and the fact that the output gap has gone. In 2010 each job applicant got half a job offer: and now each new job applicant gets two job offers. This means the labour market is very tight,’ Whitley told investors at the Kepler Trust Intelligence conference in London this week.

With unemployment at historic lows, Whitley says the trust’s second largest investment, recruitment company Temp Holdings, has the potential to perform well.

Changes to the tax system which encourage married women to return to work will also come into force, expanding the market. The finance ministry has raised the amount a dependent spouse can earn from ¥1.03 million to ¥1.5 million (£10,766) to encourage women.

‘This will make it easier for women to have better jobs,’ Whitley added.

Another potential support to the labour market is Japan’s decision to liberalise its immigration policy – a contrary move to the US, UK and other developed economies. The government’s new visa scheme for skilled overseas workers in certain sectors enables them to gain permanent residency in just a year. Likewise, the time period that highly skilled, foreign-born professionals need to live in Japan in order to qualify for permanent residency is due to be reduced from five years to three years. 

‘Record numbers of people are moving to Japan to work,’ the fund manager said.

Emerging inflation

Delivery company Yume no Machi’s decision to raise prices after 20 years represents yet another indicator that positive changes are taking place within Japan’s economy, Whitley said.

A lot of Japanese savers continue to sit on high cash levels because they have a deflationary mindset. The fund manager hopes they will soon realise that things have changed and the time is ripe to either spend or invest that money.

'There is ¥15 trillion in cash under futons, which is quite a lot of money,' Whitley reflected.

'Everybody has still got the mindset that there can’t be inflation, they say things like "there has been stimulative monetary policy and it hasn't worked, so there won’t be inflation". Well hang on guys, look at some of these figures,' she added.

In addition, restaurant bookings and car sales are increasing, while tourism remains strong.

‘There hasn’t been that animal spirits and “feel-good factor” in Japan for a very long time, despite the fact that Japan is undergoing the second longest economic expansion since the second world war if it carries on until September – which is not that far away,’ she noted.

Online growth

With this in mind, she says there are many reasons to feel excited about the prospects for Japanese companies.

She highlights Start Today as one to watch. The fashion e-commerce company, which is the trust’s third largest position, continues to grow and is in the process of developing its own fashion brand.

‘Online penetration in Japan is very low and the scope for growth for us looks very large. If they get their own label right in Japan, the scope for that to go around at least the rest of Asia could be huge,’ Whitley said.

Shareholders in Baillie Gifford Japan have enjoyed a stellar year, with its shares delivering a total return of 51.5%. This compares to a 41.2% rise by the average trust in the AIC’s Japan sector. Over five years, shareholders have enjoyed a total return (of capital growth and dividends) of 258.7%, far ahead of 193% by the sector average.

Baillie Gifford Japan and CC Japan Income & Growth (CCJI) are the only two trusts in their sector to trade at a premium to their net asset values (NAV) of 4% and 1.9% respectively. This is in contrast to other Japan trusts whose share prices stand at an average discount of 4.9% below NAV.

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