Face to face with Andy Dunn, product specialist, Baillie Gifford Japanese
Meeting summary This was a one-to-one, in-person update with Andy Dunn, who talked through Baillie...
When Japanese Prime Minister Shinzo Abe was elected on December 26, 2012, he promised a series of monetary easing, fiscal stimulus, and economic reforms designed to resolve Japan’s economic problems. These policies have been coined the ‘three arrows’ under the wider banner of “Abenomics”. Three years on, have Abenomics been successful in transforming Japan’s economy, which has lain stagnant for more than two decades?
If the stock market is anything to go by, the answer is yes. Over three years, Japanese Smaller Companies is the best performing sector up 63.73% ,with Japan in 7th place up 47.60%*.
Abe’s first and second ‘arrows’ have generally been heralded a success. Japanese quantitative easing has been 10 times the amount of that used by the US – but for an economy that is just a third of the size! We can probably expect even more in 2016.
A prolonged period of inflation came back into the economy for the first time in two decades and, corporate profitability has improved, due in no small part to the depreciation of the yen. Corporate tax cuts, which start to come into effect in 2016, will help this further, and hopefully combat the impact of wages finally starting to rise.
However, Abe’s third arrow – structural reforms – is causing some concern. What critics are forgetting, however, is that this is not a single reform but many, and they were never going to happen overnight. As Chris Taylor, manager of the Neptune Japanese Opportunities fund pointed out recently, Japan is trying to reverse 30 years of bear market and stagnant growth. It’s going to take more than a couple of years to do this.
Yes, there has been a dip back into deflation, but when you strip out the ongoing oil price falls, other prices are actually still rising. Japanese companies are also becoming more shareholder friendly. Around ¥80 trillion or £500 billion worth of cash is sitting on the balance sheets of the 1,800 companies that make up the Japanese stock market. Until now, they have had the ability, but not the willingness to spend it. That is starting to change, and Japanese companies now have one of the fastest annual dividend growth rates in the world at 22%**.
There are still huge problems and risks: the ageing population of 127 million is such an issue there is an official pro-creation workforce! Companies are even arranging dating events for employees or giving financial rewards to have kids. And the fastest growing band of criminals are the over 65s – as the standard of living in prisons is better than at home!
Government debt also stands at an eye-watering 240% of GDP. The only good news on this is that a lot of it is domestically held and, as suggested by one industry expert recently, once the government owns more than 50% of it (at the current rate of purchase that will be around 2018), it could convert it into “ Perpetual Zero Coupon Bonds”.
And then there is China. China has a much bigger impact on the Japanese economy than many people assume. So all eyes on the Asian Dragon!
* Source: FE Analytics to 2nd December 2015. Comparison with all Investment Association sectors (38 in total)
** The Henderson Global Dividend Index, 8th edition, published in November 2015