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Jupiter's Somerville backs Japanese domestic recovery

by James Phillipps on May 28, 2014 at 15:24

Jupiter's Somerville backs Japanese domestic recovery

A cut in Japan’s corporation tax and an increased allocation to equities by the government pension scheme will drive the stock market higher, according to Jupiter’s Simon Somerville.

Although Japan remains largely unloved by overseas investors who have been net sellers over the past year, the Jupiter Japan Income fund manager is backing Abenomics to work and has viewed the recent sell-off as a buying opportunity.

Much of the country’s recent underperformance has been driven by concerns about the impact of the introduction of a consumption tax on 1 April.

‘The biggest impact of the tax is the uncertainty it creates,’ Somerville (pictured) said. ‘The Japanese mindset is deflationary or of stable prices so the tax is a shock, but my view is that prime minister Shinzo Abe is very aware of this. The Japanese economy is much stronger than in 1997 when it last rose- then the banking sector was bankrupt.’

Official data released last week revealed the pending tax hike helped drive a shock 1.5% increase in first quarter GDP, in part led by a 2.1% rise in consumer spending. However, the rebound was also aided by a 4.9% surge in business capital spending, reflecting the robust health of corporate Japan.

Somerville pointed out that despite this, the Japanese stock market derated last year with all the performance coming from earnings per share growth. In contrast, European equity returns were purely driven by price-to-earnings (P/E) expansion, as were two thirds of US share price inflation.

‘Japanese equities are trading on historically low P/E ratios despite the fact earnings are growing,’ he said.

He believes further policy changes by Abe could provide a fillip for the stock markets, however. He said that talk of a cut in Japan’s corporation tax from 35% currently, one of the highest rates in the world, to 25% could have a massive impact.

‘Abe remains very popular, with an approval rating of over 50%, and he is committed to changing Japan. He absolutely understands that the success of the equity market is important to getting inflation back into the economy,’ Somerville said.

‘There is talk of lowering corporation tax to 25%. Abe is keen to make people more profit-focused and is focused on attracting companies to Japan, cutting red tape and making it easier to do business there. We could possibly see the first cut next year.’

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