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Take profits if Japan continues to rally, says top fund manager

Scott McGlashan, a Citywire AA-rated Japan fund manager, says investors should not get carried away if the country's stock maket continues to advance.

Take profits if Japan continues to rally, says top fund manager

Japan is struggling to spark inflation and has been trapped in a deflationary spiral for over 20 years. However, the world’s third largest economy could be set for a shake-up as the opposition are calling for a more radical monetary policy ahead of elections on December 14. 

Japan and ‘The Lost Decade’

The country’s economy boomed in the 1980s as property prices soared and the stock market rose. At one point the government was so confident of its finances it issued 100-year bonds. But the economy fell slumped after the real estate bubble burst in 1989, wiping trillions off the Tokyo stock exchange.

The bust heralded the beginning of the ‘The Lost Decade’, as the economy struggled to grow for the next ten years. Deflation set in as asset prices fell, the government subsidised indebted zombie businesses, banks were saddled with non-performing loans and people were wary of depositing money in indebted banks.

But the Bank of Japan fought back with its own form of quantitative easing (QE) in 2001 and so far the country has pumped 80 trillion yen into its economy, the equivalent of 20% of Japanese gross domestic product (GDP). The country also had the lowest interest rates in the developed world from 2001 to 2008 - but both actions failed to reverse deflation.

The economy was knocked off course again with the financial crisis and in the last quarter the country’s economy shrank indicating it could be drifting towards recession.

Early elections – A shake-up for Japan?

With early elections set for next month opposition leader, Sinzo Abe, is proposing more extreme fiscal intervention. The country has elected six different prime ministers since 2006 but Abe’s statements have already caused the yen to weaken and pushed the Nikkei 225, Tokyo’s main stock exchange, 5.5% higher in the past week. A stubbornly strong yen has made it more difficult for Japanese businesses to grow their exports.  

Frances Hudson, global strategist at Standard Life Investments, says: ‘The party which is likely to be elected, the opposition, seems to be advocating an all-out money printing approach to getting 3% inflation going in the economy.

‘But the Bank of Japan are definitely not in that camp, they have adopted the goal of trying to get inflation to 1% which has been pushed further and further out so it’s unlikely there will be a 3% target. The Bank of Japan is independent of the government this could open a serious debate about bringing it under the government.’

Resistance to more aggressive QE

The central bank is already trying to assert its independence by refusing to do more QE in November and has raised questions about its effectiveness in the past.

Scott McGlashan, the Citywire AA-rated manager of JOHCM's Japan fund, comments: ‘The Bank of Japan published a paper a couple of years ago saying QE didn’t do the domestic economy any good. All it did was push up commodity prices and US house prices as you just flooded the world with liquidity that there was no domestic demand for.

‘The current governor of the Bank of Japan has been very cautious about QE, what he has engaged in he has done quite reluctantly under political pressure. I’d be pretty sceptical about the efficacy of QE in Japan let alone the rest of the world.’

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1 comment so far. Why not have your say?


Nov 21, 2012 at 19:38

Tsk, tsk Caelainn, sloppy.

What the heck is a 'dtrategist'?

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