Abe five years on: reasons why Japan could still be a good investment

On 5 December 2012, Shinzo Abe was elected prime minister of Japan and launched his extraordinary stimulus programme ‘Abenomics’. It’s been an eventful, but largely successful, five years. The Nikkei has risen 112%* surpassing the 22,500 level for the fist time since 1991 and, fresh from another landslide election victory, Abe has been given a clear mandate to progress with his policies.

I think the Japanese stock market has further to go and here’s why:

Five reasons to be optimistic

1. Valuations: Compared to most other developed markets, Japan is still relatively good value. Believe it or not, the stock market is still more than 40% below its peak of 38,918 in 1989. It is also under-owned both globally and locally. Despite Japan being the third largest economy in the world, just 3.6% of UK investors’ equity assets are invested in the Japanese stock market**.
2. Companies: The operating environment for Japanese companies – particularly smaller ones – has improved considerably. Government policy remains geared towards industry deregulation, with a number of progressive policies already implemented. Corporate profits are looking healthy and earnings momentum is on the rise. Profit margins are expanding and more companies are paying dividends.
3. Economics: Japan’s economy has grown over seven consecutive quarters – a trend not seen for more than a decade.. Unemployment stands at an all-time low. Apparently there are 1.5 vacancies for each person looking! More women are returning to the workplace.
4. Inflation: After two decades of deflation, inflation is starting to stick. We are starting to see production price increases, which should lead to more sustained wage inflation.
5. QE: The Bank of Japan is still supporting the bond market, as well as equities, and Kuroda, the governor, has already hinted that his central bank does not have to go in the same direction as others, suggesting loose monetary conditions will persist.

A word of caution

There are of course risks as well as opportunities. Abe will need to overcome a number of obstacles in order to end finally economic stagnation. The first is inflation. While it is in positive territory, it remains some way off the Bank of Japan’s 2% inflation target. Meanwhile, the country’s low birth rate and ageing population represents another challenge to economic growth.

However, in spite of the headwinds, I feel excited when I think about the path ahead for Japan. Five years in power and armed with a fresh mandate, I think Abe will succeed in driving further positive change. Japan, in my view, warrants a long-term allocation.

How Elite Rated Japanese equity funds and trusts have performed over the past five years

Baillie Gifford Shin Nippon: This trust is the best-performing Japanese fund since Abe became prime minister. It has returned 358%* and is number one out of 75 different funds and trusts in the IT and IA Japan sector. It invests in smaller companies and is currently trading at a premium of 9%***.

Baillie Gifford Japan Trust: This is the second best performer of the period, returning 315%*. It is run by the same team but is the slightly less risky option as it invests in medium and smaller companies. It is also currently trading at a premium of 7.5%***.

T. Rowe Price Japanese Equity: This fund invests in Japanese companies of all sizes, although with a notable overweight to smaller firms. The manager adapts his investing style as needed to suit changing market conditions. It has returned 144%*.

Schroder Tokyo: This fund was launched near the peak of the Japanese bubble in 1989 and has had only two managers during its lifetime. It has benefited from the cautious, quality-orientated strategy adopted by the management team. It has returned 121%*.

Man GLG Japan CoreAlpha: The team focus exclusively on large and medium-sized value companies, in the belief that this area of the Japanese stock market outperforms around 70% of the time. It has returned 150%*.

*Source: FE Analytics 5 December 2012 to 23 November 2017, total returns in sterling.
**Source: Investment Association sector statistics, August 2017.
***Source: The Association of Investment Companies, 27 November 2017.