‘You will probably make 10 times your money in five to seven years,’ Taylor said. Since September 1982 Japanese equities have risen 2.5 times he said, compared with a 32-fold surge from the S&P 500 over the same period.
Assessing the scope for Japan to recover the ground lost to the US in the years ahead, Taylor claimed: ‘You can stick a number in front of that two. It could be one, two, three or four.’
Taylor’s case is based on both the strength of Japanese businesses and the yen continuing to weaken.
‘The companies are staggeringly good at what they do. The country, on the other hand, is a basket case.’ He highlighted that Topix corporate profits had risen by 108% year on year in the six months to the end of September, only partially explained by the yen’s 15% slide through the same period.
‘People think they are all exporters, but they’re not. People think they’re still losing money, but they’re not. If something is misunderstood, it is mispriced.’ Taylor noted, for example, that Nissan makes 72% of its cars overseas; Japanese companies in aggregate earn four to five times more internationally than domestically.
Taylor contended that this would confer a significant translational benefit as revenues were repatriated into the weak yen, although not an enduring competitive advantage.
The sterling exchange rate could rise from 170 yen today to around 250 – its level before the financial crisis – as Japan’s monetary base doubled through the government’s stimulus package, Taylor predicted. H
e expressed confidence that the government would permit this depreciation as it would boost corporate earnings and so improve the tax take, helping to eliminate the budget deficit and ultimately reduce the national debt.
However, he urged investors to bear in mind the negative side of the currency story too. ‘You must be hedged.’
Taylor observed that he was happy to employ that currency hedge, unlike his peers. ‘The others give you the option of buying a hedged version.’
Taylor challenged the usefulness of leaving hedging to the investor, not least because switching between the share classes can incur capital gains tax. Of funds that had hedged and unhedged options, he suggested: ‘Ask them for half the fees back, because you are making the second most important asset allocation decision.’
Thanks in part to his currency hedge the Neptune Japan Opportunities fund has returned 62% over the past year, ahead of both his benchmark Topix’s 34% and the 35% from his sector.
Taylor nevertheless acknowledged that a 10 times return was far from guaranteed. ‘If Japan does not pull off this trick, it will go bust.’
He concluded: ‘Equities can go down as well as up. If you have a long enough memory, you’ll know that even Japanese equities can go down.’