Japan: Abe’s legacy for investors

The senseless killing of Shinzo Abe, the hugely respected former Prime Minister of Japan, has been sending shockwaves around the world.

The 67-year-old, who became the country’s longest-serving premier before leaving due to illness in 2020, was fatally shot making a speech. In the wake of the tragedy, politicians, economists, investment managers and commentators around the world have been discussing his impact on Japan.

Here, we get views on how he transformed Japan, analyse whether the country is attractive for potential investors, and highlight some funds worth considering.

Abe’s legacy

A statement from Matthews Asia declared that Abe had a “profound impact” on Japan’s domestic and international policies. “He projected Japan’s commitment to addressing global issues in partnership with other nations and his long tenure nurtured a sense of Japan’s familiarity and dependability around the world,” it said.

But Abe will probably be most remembered for the economic reforms that he introduced after coming to power for the second time in 2012.

Daniel Hurley, a portfolio specialist who works closely with Archibald Ciganer on the T. Rowe Price Japanese Equity Fund, told us the loss was a “deeply sad day” for the country. “Over his eight-year term, Abe established political stability, enhanced Japan’s international presence and introduced a new brand of constructive economic and social reforms,” he said.

He added that the fund had held a positive view of Abe’s reform programme, known as Abenomics, as it brought “stability and clarity” to investors from a political governance dimension. “His successors have since looked to extend Abe’s positive and popular market reforms,” he added. “For example, the Japanese government has recognised the importance of digital reform for its economy to move forward.”

While Japan may lag its developed market peers, Daniel Hurley believes it’s catching up. “Japan’s workforce is shrinking, and growth will therefore need to come from better productivity, which will be enabled by using digital technology more extensively,” he added.
The T. Rowe Price Japanese Equity fund has diversified exposure to sectors within Japan. In fact, the 10 largest holdings in the portfolio hail from six industries. Favoured names include machinery company Hoshizaki and Nintendo, the popular video game developer whose products are sold around the world*.

The Japan of today

There are three major growth opportunities within Japan, according to the most recent quarterly update from the Baillie Gifford Japanese fund.

The first is Japan’s digital revolution. “Online retail, advertising and media benefit from a strong growth runway that began in earnest some years ago,” it stated. “At the same time, Covid has engendered new behaviours, ended long standing traditions and underpinned new online categories.”

The premiumisation of demand from emerging Asia is the second key trend followed by the portfolio. “Some quality consumer franchises have fallen out of favour after a temporary setback and we have used share-price weakness to increase positions in Shiseido, Kao and Pola Orbis, all of which benefit from strong skincare brands,” it stated.

Finally, the fund is excited by the growth prospects for Japanese robotics and automation. “This is an area where the combination of hardware and software expertise is difficult to master and, as a result, Japan has maintained its global lead,” it added.

Outperforming the US in 2022

Japan has continued to outperform the US since the start of the year, according to the most recent update from the managers of the Comgest Growth Japan fund. They suggested this may reflect factors such as the “mildness of Japan’s inflation”, and the recent Covid-19 rebound.

“As Covid-19 restrictions ease, people are flocking back to the real economy to savour their favourite activities: shopping, eating out and travelling,” they wrote. “International tourists are gradually returning, and the direction of travel is heading towards economic normalisation.”

Although the managers acknowledged that additional waves of Covid-19 cases may occur, along with other unpredictable events, they believe consumer confidence has largely bounced back. “This should, in our view, support the recovery of the businesses in your portfolio during the near-term and beyond,” they added.

Other ways to get exposure to Japan

A dedicated Japan fund is not the only way to get access to the country. For example, Stewart Investors Asia Pacific Leaders Sustainability has a 10.6%* weighting to Japanese equities, Mid Wynd International has 7.2%* allocated to country and Jupiter Merlin Growth currently holds 8.3% of the portfolio in the LF Morant Wright Japan fund, which invests in around 50 Japanese companies of various sizes*.

*Source: fund factsheet, 31 May 2022