After a dreadful start to the year, Japanese shares spent most of April recovering nicely. All five of our Elite Rated Japan equities funds were among the top 10 Elite Rated performers1. At the last minute, however, the Bank of Japan (BoJ) threw a spanner in the works.
Haruhiko Kuroda, the BoJ’s governor, announced he would keep rates on hold and not provide any further economic stimulus in the coming month. This went against investors’ expectations, given the slew of poorer-than-expected economic data emerging from Japan over the past few weeks. The stock market subsequently tumbled and Japan’s currency, the yen, rose in value.
It isn’t the first time this year updates from the BoJ have resulted in plummeting share prices. At the end of January, the bank introduced negative interest rates for the first time in Japan’s history in a bid to keep growing its economy.
While lowering rates normally helps a country’s currency devalue (which is useful for the large number of Japanese corporates with significant overseas earnings), the move that time round bizarrely boosted the yen and so sent equities 14.7% lower in the two weeks following the cut2. People feared the dream team of Prime Minister Shinzo Abe and Kuroda might finally be out of ammunition.
But that’s Japan in a nutshell really; investors can either be wildly successful or wildly unsuccessful. Politics, the central bank and the currency make or break returns, and the traditional wisdom of taking a long-term view hasn’t necessarily proved profitable.
The stark truth of it is that over the past 20 years UK investors would have been better off keeping their money in cash than the Japanese stock market3.
More recently, however, the case has been promising. I’ve been bullish basically since Abe returned to power at the end of 2012 and the market has recovered by more than 50% from that point, despite this year’s performance4.
Learn more: How to choose which fund to buy
A new three arrows?
Back then, there was a renewed sense of optimism in the land of the rising sun. Abe’s famed three arrows were just being ‘nocked’ (for the archers among you) and if the world’s third largest economy was poised for a comeback, people wanted to be part of it.
Three years on, results are mixed. Japan’s biggest danger is its debt and, try as they might, the Abe–Kuroda dream team just can’t get the economy going in a way that will raise sufficient tax revenues to fund the budget and start to make a dent in those loans.
Deflation hasn’t been vanquished as Abe enthusiasts might have hoped. And the extended period of low to non-existent price growth has done serious damage to the Japanese mentality. Someone who joined the workforce 20 years ago, like I did, has only just seen a small period of sustained inflation for the first time. It’s no wonder employees remain reluctant to splurge and consumer spending isn’t contributing what it ought to the nation’s economy.
On that front, some are now starting to suggest a “new” three arrows. I met with manager of the Legg Mason IF Japan Equity fund this week, Hideo Shiozumi, who now refers to the initial three arrows as the new first arrow.
A second arrow will work to enhance childcare support, with dual aims to raise the birthrate in a battle against Japan’s ageing demographics, and also to get more women back into the workplace. And a third will target a reduction in the number of people forced to leave employment to care for elderly family members.
With this view in mind, the Legg Mason IF Japan Equity fund focuses on what it calls the “new Japan”. Instead of investing heavily in large manufacturers at the top end of the stock market, Hideo believes the future lies in companies like internet distributors, inbound tourism operators, and medical and elderly healthcare providers.
In many ways, it is a persuasive proposition with some interesting ideas. The fund is not Elite Rated, largely because its performance has been inconsistent. Over the past five years, its returns have by far topped the IA Japan sector5. Over the past ten though, it comes in much further down the list6. As always in Japan, different styles of investing find favour at different points – a point I’ll discuss in more detail below.