Japan’s Topix index surged more than 50% in yen terms last year, which Shiozumi (pictured) attributed to the first two ‘arrows’ of Abenomics – fiscal stimulus and monetary easing.
‘The first two arrows have already produced good results,’ Shiozumi said. ‘That’s why last year the market was up sharply.’
However, Shiozumi argued that the next arrow of structural reforms would not yield such instant results.
‘I think the third arrow of growth based on structural reforms could take about two to three years. Of course, structural reforms will have to be accompanied by some short-term pain.’
Shiozumi therefore estimated that Japanese equities would return 10-15% this year and next, which he regarded as a somewhat conservative prediction.
‘If during the second half of this year the economy is not so adversely affected by the consumption tax increase and economic growth is higher than people are expecting, then of course the market could become much stronger than I am expecting.’
Shiozumi said the structural reforms would begin to pay off in 2016, which he suggested could be an even better year for Japanese equities than 2013.
‘In 2016, the fourth year of Abenomics, we should see more clear signs of Abenomics working successfully.’ As indicators pf success, Shiozumi said he was looking for inflation to exceed 2% and a nominal GDP growth rate of more than 3%.
‘So I think we could see an even stronger market in 2016, stronger than last year.'
Shiozumi also bet that Japan would weather this month’s increase in its consumption tax from 5% to 8% thanks to government support for the economy.
‘Mr Abe will have to make a decision in October about the next round of the consumption tax increase. If the economy is improving between July and September, Mr Abe will make the decision to increase the consumption tax from the current 8% to 10% at the end of next year,’ Shiozumi said.
‘I think Abe will do everything to keep the economy growing so that he can effect another consumption tax increase, which is good for Japan’s fiscal health.’
On the strength of the country’s currency, he believed that the yen would remain in its current range of between 101 and 105 against the dollar, given countervailing pressures on the exchange rate.
Monetary intervention if the economy does suffer could depress the rate. ‘The yen could weaken to close to 105 some time in the second quarter of this year. Depending on the economic situation, I think the Bank of Japan might effect further monetary easing so that economic growth will not drop.
Set against that, though, is an improving outlook for inflation. ‘At the moment, consumer prices are increasing by about 1.3% or 1.4%. But if we see higher inflation towards the end of this year, the yen will probably strengthen slightly.’
Shiozumi concluded: ‘I don’t think the yen will move very widely this year.’
His Legg Mason Japan Equity fund tops its Citywire sector over both three and five-year periods. On a three-year view it has returned 101.2%, compared with an average of 10.4% from the peer group and 6.1% from the Topix.