the government of japan’s new prime minister, Shinzo Abe, is using aggressive monetary and fiscal policies to try to dig the country out of its 20 years of deflation and virtually no economic growth. No one knows if this strategy will work in the long term, but the 20% depreciation in the yen over the past year already is pushing up corporate profits and equities valuations.
The broad Topix index rose by 54% in 2013, but a number of Canadian portfolio managers of global funds still are overweighting Japanese equities, expecting further depreciation in the yen, strong earnings growth and more stock price appreciation this year. (See page B14.)
Portfolio managers specializing in Japanese equities are equally enthusiastic about exporters based in Japan, while also are finding opportunities among real estate, financial services and construction companies.
Japan’s consumer-products companies are more challenged, given the pending increase in the sales tax to 8% from 5% on April 1, and to 10% in 2015. This move is needed to reassure foreign investors, given the country’s debt, which is more than 200% of gross domestic product.
Abe’s government is trying to offset the negative impact of the higher sales tax with job-creating infrastructure spending, tax breaks for homebuyers and companies that pay higher wages, and by removing a three-percentage-point corporate income-tax surcharge.
The massive infusion of liquidity into the system through the Bank of Japan’s purchases of bonds held by financial institutions also should get domestic banks lending more.
What will be the overall psychological impact of these measures?
“It’s a difficult [question],” says Charles Edwardes-Ker, vice president and director with TD Asset Management Inc. in Toronto. “It’s hard to ask consumers to pay more when corporations may be getting tax breaks. But Japan has to make sure it’s an attractive place for companies to be based.”
Spencer Mellish, senior portfolio manager in Toronto with London, Ont.-based Highstreet Asset Management Inc. and portfolio manager of AGF EAFE Equity Fund, believes Japan will go through a “digestion period,” in which people will spend now to avoid paying higher taxes later.
However, even if these policies work, they won’t get the country on a sustainable growth path without fundamental reforms.
“[Abe has] probably done the easy stuff – a little bit of fiscal spending, printing money,” Edwardes-Ker says. “The new structural reform is the hard bit that he has to try to deliver.”
Some sectors in which reform is being discussed are health care, energy and labour, says Eileen Dibb, portfolio manager with Pyramis Global Advisors in Smithfield, R.I., a division of Boston-based FMR LLC, and manager of Fidelity Japan Fund.
It’s important to change Japan’s labour practices, says Erwin Hidalgo, director and portfolio manager of Investors Pan Asian Growth Fund in Hong Kong for Winnipeg-based Investors Group Inc. In the past, he says, companies were expected to keep employees for life, which has been a burden on employers. The result has been wages based on seniority rather than skill or productivity. As a result, firms have turned to temporary employees who don’t receive benefits.
The government is working to phase out the existing culture of jobs-for-life vs cheap labour in favour of a more manageable compromise. This labour imbalance has been an obvious problem for more than 10 years, Hidalgo says, but this government is the first to tackle it head-on.
Here’s a look at some of the investment themes that portfolio managers are pursuing in Japan:
– 2020 olympics and casinos. Economists, Edwardes-Ker says, believe Tokyo’s hosting of the games will add to growth and encourage infrastructure projects that have been on the back burner.
Hidalgo agrees, adding that an expected reversal of a ban on casinos also will benefit the real estate and construction industries.
– real estate. The Bank of Japan is injecting large amounts of liquidity into the domestic financial system in an effort to get asset prices rising – and it’s working.
“What we’re seeing in some areas of the real estate market,” Dibb says, “is a return to asset prices increasing [and] better vacancy rates.” One of her top 10 holdings as of Sept. 30 was Mitsui Fudosan Co. Ltd., a real estate company that should benefit from spending for Olympics infrastructure.
– financials. Mellish favours Zenkoku Hosho Co. Ltd., a mortgage guarantor, the only company in Japan that is able to provide a “quality guarantee” (one of two types of guarantees available to those who cannot find a co-signer for a mortgage). Zenkoku firm is increasing market share and also will benefit from home-buying incentives.
– exporters. With the weaker yen, Edwardes-Ker is interested in multinational companies, although he does not prefer multinationals over domestically focused companies. One favourite is tire maker Bridgestone Corp., which will benefit from the recovery in the U.S. auto industry.IE
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