For anyone who doubted the power of Abenomics, last month provided a definitive answer. Not in the form of Shinzo Abe’s re-election as prime minister on 22 October, but in a far more significant seal of approval: the announcement two days later that St James’s Place (SJP) would launch a dedicated Japanese equity fund.
The fund will be managed by Yoshihiko Ito of Nippon Value Investors, based in Tokyo. As New Model Adviser® revealed earlier this year, SJP makes huge profits from its own funds, earning five times as much as the managers in one case. So it is safe to say it will have high hopes for Japan.
‘Abe’s election win is significant for two main reasons,’ explained Chris Taylor, head of Japanese equities at Neptune. ‘First, it paves the way for substantial fiscal stimulus in 2018, while maintaining loose monetary policy. Both of these are seen as big positives for the market. Second, it raises the possibility for constitutional reform – specifically Article 9, which was at the centre of the campaign in the lead-up to the election.’
This is the clause of Japan’s constitution that prevents the country from going to war. ‘Abe’s aim would be to revise the pacifist legislation that currently forbids Japan from using force to settle international disputes and restricts its land, air and naval forces to a strictly defensive role,’ Taylor noted. ‘His popular handling of the North Korea conflict makes constitutional reform increasingly likely.’
A different war chest, namely that of the Bank of Japan, interests others. And the fight against inflation should keep the chest open. The country’s inflation rate is expected to come in around 0.4% for 2017, well below the official target of 2%.
‘Current trends seem to suggest that, even by late 2019, inflation will only have reached 1.5%,’ said Naoki Kamiyama, chief strategist at Nikko Asset Management. ‘Japan is therefore unlikely to have surpassed the 2% target. The Bank of Japan will need to maintain its quantitative-easing programme for the foreseeable future.’
‘It is true that inflation continues to lag below the levels the Japanese central bank expected, so it is possible inflation forecasts will be downgraded slightly,’ agreed Katsunori Kitakura, lead strategist at SuMi Trust.
‘Although we do not believe the Bank of Japan will introduce further easing measures to counter this, it remains unlikely to move away from monetary easing in the short term. The Bank of Japan continues to be wedded to the 2% inflation target, although this will not be achieved any time soon.’
Importantly, weak inflation is not a result of anaemic growth. ‘Fundamentally, the Japanese economy is doing well,’ said Junichi Inoue, head of Japanese equities at Janus Henderson. ‘The economy has entered an autonomous growth phase. The unemployment rate is at an all-time low and there is more than one offer for every job applicant.’ He said household income and consumption were also on the up.
‘On the corporate side, industrial production has exceeded the post-great-financial-crisis high and there is increasing demand for capital expenditure,’ added Inoue. ‘The financial-statements statistics of corporations by the Ministry of Finance show that corporate profit is at an all-time high, not only for large corporations but also for small businesses.’
Kamiyama said there were signs economic confidence was still growing in the country. This was reflected in the upbeat ‘tankan’ business sentiment survey released before the election and another index indicating that manufacturers were more positive now than at any time over the past decade.
‘It will be important to keep tabs on export numbers when evaluating new investments, including in the machinery, electrical parts, and electronics sectors,’ Kamiyama nevertheless advised. ‘Investors would be wise to look at first-half results when they are released in October and November. These should provide indications of the viability of earnings forecasts for the rest of the fiscal year.’
Taylor highlighted that while earnings reports have been encouraging so far this year – 70% of results beat companies’ own forecasts, ‘a comprehensive and widespread improvement across a range of industries’ – Japanese equities were ‘still undeniably cheap’. The MSCI Japan index trades on a price-to-earnings ratio of 16.7, despite the market having rallied by more than 20% so far this year, compared with the MSCI World’s valuation of 21.1 times earnings.