For many years, investors ignored the Japanese market while it languished in the doldrums.
What was euphemistically referred to as the ‘lost decade’ was in fact closer to two with Japanese equities underperforming the global stockmarket in 17 of the past 25 years.
External factors such as the Asian crisis of 1997/98, the Tohoku earthquake and tsunami and Thai floods have all added to Japan’s economic woes, along with deflation.
After a period of introspection and the re-election of prime minister Shinzo Abe, it could be the dawning of a new era for Japan. Abenomics – his strategy of raising growth and ending deflation involves monetary policy, fiscal policy and structural reform.
Some headway has already been made: Haruhiko Kuroda, the governor of the Bank of Japan, has set an inflation target of 2 per cent to be achieved within two years; a depreciating yen has made Japanese goods more attractively priced; and corporate earnings should benefit from a more competitive currency.
The weakening yen, which has benefited exporters and contributed to stronger returns since last summer, has admittedly impacted sterling investors. However, while we expect the yen to weaken a little further, there is a reduced risk that gains will be offset by the currency.
In spite of improved sentiment, the economy faces an uphill battle with talks of ‘currency wars’ with Europe and Asia and fiscal stimulus creating even larger debts.
A key cause for concern is the third element of Abe’s strategy: structural reform. There is a lack of clarity surrounding it – how long it will take to implement and will it actually hit target?
Some policy changes will be unpalatable and details are probably deliberately vague ahead of the Upper House elections on July 21, after which there are no major elections for two years.
We expect Japanese equities to improve in the next 12 to 18 months. However, the market is likely to remain extremely volatile and may be a test of patience requiring careful monitoring of key developments as Japan puts its fiscal house in order.
Bambos Hambi is head of fund of funds management at Standard Life Investments
