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Japan: investors poised for another strong year

More stimulus will push the yen lower, helping Japan's exporters say analysts, asset managers and other pundits.

 
Japan: investors poised for another strong year

Investors and market pundits are poised for more stock markets gains from Japan in 2014, albeit not a repeat of this year’s thumping returns.

They’re hoping to add to the 56% gain delivered by Japan’s Topix share index over the past year, returns that have coincided with Shinzo Abe’s first 12 months as the country’s growth-hungry prime minister.

More stimulus will push the yen lower, helping exporting companies’ bottom lines and their share prices, predict bank analysts, asset managers and other pundits.

So far the unfettered policies engineered by Abe and Bank of Japan governor Haruhiko Kuroda have delivered a short-term rise in inflation, better growth, and yen depreciation that has helped boost profits for exporting companies like car-maker Toyota.

‘Japan has embarked on a clear and credible path, and ‘Abenomics’ has been transformative… More challenges lie ahead but we expect further gains in equities and are overweight in financials and beneficiaries of policy action,’ said Mark Burgess, chief investment officer at Threadneedle.

In a Nomura survey of some 1,600 investors three quarters of respondents were bullish towards Japanese equities. Analysts on average expect 16% gains on the Nikkei index, a Reuters poll showed.

But so far it has been a bumpy ride and Abe’s ‘shock and awe’ tactics haven’t assured a long-lasting recovery, nor made inroads into Japan’s huge public debt.

Critics wonder about the third of Abe’s ‘three arrows’: structural reforms (after fiscal spending and massive quantitative easing).

They are particularly worried by plans for a rise in Japan’s sales tax in April, which is needed to help fund Japan’s rapidly ageing society.

The country currently boasts the lowest sales tax rate, or VAT, in the developed world at 5%, but from 1 April 2014, the government will increase the rate to 8%. That will prove tough on Japanese households, watching their wages decline and questioning whether only big business is benefiting from Abe’s efforts.

And it is enough to keep some investors away. ‘With regard to Japan, we need to see clearer signs from the government, as we near the April tax hike, that it will apply strong fiscal and monetary measures to alleviate the tax increase,’ said UBS Wealth Management in a cautious 2014 outlook report.

Even the bulls say they’ll be particularly watchful during the first months of 2014. ‘We are confident that government policy is heading in the right direction and that the necessary adjustments will be made. However, the first months of 2014 will be crucial for Japan and we remain vigilant,’ said Andrew Cole, manager of the Baring Multi Asset Fund .

Then there are the threats that are out of Japan’s control. Like other markets, the fate of Japanese shares could largely be dictated by US policy in 2014. If the US economic recovery is delayed, and the ‘tapering’ of US stimulus alongside it, the US dollar will present more of a challenge for investors who are basing their investment case for Japan on further yen declines.

But further stimulus measures to offset Japan’s sales tax are expected to keep the yen down.

Arnout van Rijn, fund manager at Robeco, has increased exposure to Japanese stocks in recent weeks: ‘It’s very easy for the Japanese to print money and the effect is going to be a rise in the stock market.’

And the man on the Japanese street could actually provide a further boost to stocks. After all, Japanese domestic investors have been sticking with bonds. It is foreign money that has funded 2013’s rally, with foreigners investing more in Japanese stocks than they ever have before, $125 billion worth in the past year according to a report in Bloomberg. 

‘Domestic investors are still very bond heavy with limited exposure to Japanese equities… and so as we move into 2014 the participation of domestic investors in their home equity market should continue to provide support,’ John Bilton of Bank of America Merrill Lynch says.

Some of the best investment trust managers are putting their faith in Japan. ‘I’m going to buy into the dips’, said Alex Crooke, manager of Bankers .

‘Japan could surprise by continuing to recover faster than other developed markets,’ added Andrew Bell of Witan Investment Trust .

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