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AA-rated Taylor: Japanese reboot only at startup stage
by Danielle Levy on Mar 18, 2014 at 00:01
The Citywire AA-rated manager refers to ‘Abenomics’ – or the changes brought about under prime minister Shinzo Abe – as a ‘system reset’.
‘It is just like hitting Control, Alt + Delete on a PC. It resets and reboots it. It is the same hardware, software, information and keyboard but with a different set of instructions being put in. They are using all of the existing policies and tools but in a different balance and scale that they used before,’ he said.
‘Where the two come together is through yen weakness. You have terrific earnings growth anyway, and what the government is trying to do is trash the yen and the overseas earnings go through the roof in yen terms.
‘That money coming back into Japan pays down the budget deficit and national debt, which avoids bankruptcy and reverses a 30-year bear market and economic decline in Japan.’
Taylor highlights yen weakness as a key driver but argues that commentators and investors alike are not appreciating its true impact. While many focus on the consequences of a weaker currency for exporters, he points out that it does not actually boost competitiveness.
In his view, a long-term shift from export-only to a multinational production and sales model has not necessarily been understood by investors and can be identified across a number of sectors. For this reason, he says it is all about Japanese companies and not necessarily about the country, as corporate restructuring drives strong profits growth.
He points out a number of Japanese companies have become the most global of global multinationals compared to EU and US rivals. ‘This means a lower dependency on the home country and this will drive corporate profit growth,’ he said.
What is more, Taylor believes the market is still looking cheap. ‘You have got a market that is underpinned by good fundamentals and estimates are way off what the reality is,’ he explained.
While the yen has already fallen 20% against the US dollar since Abe was elected in December 2012 through to the end of 2013, he expects there will be even more yen weakness to come. In his view, the yen could go as low as 350 to sterling, marking a real change from the 173 it is trading at today.
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