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Japan debate intensifies after Nikkei rally

Can Japan's stock market gains of recent months translate into an enduring market and economic recovery?

Japan debate intensifies after Nikkei rally

Perhaps the harshest warning you can level about an economy, the one governments, central bankers and investors dread, is that it is sinking into a ‘Japanese-style’ funk.

The world’s third-largest economy, having been overtaken by China recently, has been the perennial investment disappointment. 

Two ‘lost decades’ have provided plenty of time to prophesise new beginnings. But after many false starts, and a year after the devastating Tohoku earthquake, stock market gains so far this year – at 10,123 the Nikkei is up 15% – are waking investors from their deflation-induced slumber.

Life support

Japan’s stagnant and deeply indebted economy, which was hit so hard by last year’s earthquake as well as the Asia-wide impact of floods in Thailand, is starting to show signs of life. The central bank surprised markets last month by extending its asset purchase programme in a move that according to Jonathan Ruffer and his co-managers of the Ruffer Investment Trust ‘gets a hungry investor’s saliva glands working’.

The Bank of Japan has increased its quantitative easing (QE) asset purchase programme to ¥65 trillion (£490 billion) from ¥55 trillion. It has also announced a new inflation ‘goal’ of 1% year-on-year change in a bid to defeat its long-standing enemy: deflation. 

‘Given that companies and investors in Japan have become so accustomed to falling prices, the effect of a small amount of inflation could be dramatic; a growing top line will quickly reveal the cheapness of companies that have been cutting costs and prices for years,’ commented Ruffer, whose investment trust (a Citywire Selection Star Pic k ) includes a 23% bet on Japanese shares, in his latest update to investors.

But, as Ruffer acknowledges, we’ve been here before. Jaded investors simply don’t trust the Bank of Japan. There are concerns that the Bank was acting in response to political pressures; though bank governor Masaaki Shirakawa has since said bending to politicians would be ‘suicide’.

Then there are worries that the Bank simply won’t deliver on its promises. ‘Investors are still very wary indeed about whether the Bank will follow through,’ said Andrew Milligan, head of global strategy at Standard Life Investments and a long-time Japan watcher.

Jane Andrews, fund manager at Smith & Williamson, adds that the Bank is setting woolly inflation ‘goals’ rather than the more concrete ‘targets’ pursued by other countries.

Weak currency, strong exporters

Whether or not they’ll help in the long term, hopes that the Bank will continue to stimulate the economy have provided a much-needed adrenaline shot.

A strong yen has long hampered the Japanese economy, making it difficult for companies to recover from last year’s disaster, but hopes of more stimulus have weakened the currency, which hit an 11-month low against the dollar on Thursday. This has helped Japan’s blue-chip exporters, making their goods more affordable to foreign buyers, with the benefits reflected in the Japanese stock market’s rise.

Further declines are needed. But the weaker yen is a boon for Japan’s already strengthening global companies, which have been praised for their rapid recovery from the tsunami that ravaged Japan’s north-east coast. ‘Corporate earnings have shown, and are further expected to show a significant recovery during the year. Corporate Japan continues to advance as historically high levels of free cash flow continue to be generated and returns have bounced back following the disaster,’ Shogo Maeda, head of Japanese equities at Schroders, recently told Citywire.

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8 comments so far. Why not have your say?

Barry Evans

Mar 16, 2012 at 10:16

I feel that I should have benefited but my long standing savings in Invesco Perpetual Jap' Smaller Co's continues to slide backwards. Anyone know why?

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Ian Burgess

Mar 16, 2012 at 11:10

My Neptune Japan isn't exactly tearing up trees either. Surely, after the tragedy of the tsunami construction and related fields would do well. Difficulty is finding a Japan fund which invests in those areas.

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Matthew Charles Flinders

Mar 16, 2012 at 11:14

Read the article again Barry! Japan is still not on steady ground, but at least there is light at the end of the tunnel. Perhaps a good opportunity for investment in the coming months/year. All depends on how their government and central bank acts.

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Mar 16, 2012 at 11:23

Or you could invest in Aberdeen All Asia or Witan Pacific, both of which include Japan, and have been doing reasonably well of late.

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Mar 16, 2012 at 11:28

My GLG Core Alpha Japan holding has just moved back into the black, I also hold several of the Ruffer funds [and the IT] which have large Japan holdings. You need to read between the lines on this - you have a rising market but a falling currency and it is the net between the two that will give you your increase. I considered hedging in anticipation of this but all the advice was to remain as I am = unhedged. More to buying in Japan than just buying a fund but here's hoping this may be the turning point, if it is a lot of upside, if not more of the same!

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Anthony O' Grady

Mar 17, 2012 at 09:44

If you do believe that Japan is on the move, as the much respected managers of the Ruffer trust do, you could do worse than buy the Baillie Gifford Japan trust which is currently trading on a very decent discount. Long standing and very experienced manager.

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William Bishop

Mar 17, 2012 at 10:13

There is likely to be an element of swings and roundabouts, as the Japanese stock market is only likely to go on performing well in the context of a weakening yen. This is particularly so when foreign investors in Japan tend to favour the shares of large exporting companies, much of the domestically-oriented and service sectors still being rather inefficiently run, and not oriented towards creating value for shareholders.

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John Whiteley

Mar 17, 2012 at 18:08

Having looked at the possibilities about a month ago, I bought the Lyxor Japan Topix ETF. (LTPX) That has done fairly well, even in a month, but is capped by Yen appreciation, of course. If you believe in Japanese recovery, you have to believe in minimal QE. Whether that will actually happen remains to be seen.

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