View more on these topics

Hugh Young: Why Japan deserves another look

Hugh Young

Spring is special in Japan. The blossom of cherry and plum trees invites viewings – or “hanami” – across the country. The tradition speaks to the country’s appreciation of nature and the passing of seasons. But as the Japanese economy picks up momentum, will this rebound prove as ephemeral as the spring cherry blossom?

For the first time in a while, Japan has much to shout about. There has been good news from the domestic economy, including the re-election of Prime Minster Shinzo Abe and strong economic data, but also supportive global factors, particularly the low oil price and the US-led recovery. Let’s look at the issues.


Oil and wages

The large fall in the oil price since last summer has significantly lowered costs for businesses and boosted incomes, as Japan is a large net oil-importer. On the other hand, the oil price fall may entrench the deflationary mind-set, historically a problem in Japan. What could change that is a pick-up in wages.

Japan’s retirement squeeze has encouraged many women back into the labour force and kept unemployment firmly anchored. In March, Toyota and Nissan agreed to raise basic wages by about 3 per cent this year, the largest annual increase in a decade. If others follow, the current upswing in spending may last. Part of Prime Minister Abe’s carrot-and-stick approach is a phased reduction in corporate taxes, which may have mixed results as only three-in-10 companies actually pay corporate tax.


Too much cash

Many companies are having trouble growing profits, evident from the corporate sector’s growing cash pile. Hoarding appears to be a reaction to the last crisis, as deleveraging from the bubble years took over a decade. Compounding this problem is a lack of attractive domestic investment opportunities.


Top(ix) of the class

The Nikkei is at its highest since April 2000. Japanese equities have outpaced other major markets this year in dollar terms. The rally stems in part from the weak yen’s boost to exporters but also the translation effect on foreign earnings. The yen has actually strengthened a little this year against most currencies.

Meanwhile, the Government Pension Investment Fund has committed to buying equities in bulk. Yet for investors with patience the more exciting development is that, slowly, companies are open to buybacks or raising dividends. The push is coming both from inside Japan and outside. We welcome any move that leads to greater corporate responsiveness to shareholder interests.


Comply or explain

Although we have no fixed view on “Abenomics” itself, our interests converge with his. Abe is pressing hard for companies to set targets for returns, to take on more non-executive directors and to adopt transparency. Persuasion, not force, appears to be his weapon of choice. Thus, the new codes are not binding but rest on “comply or explain” terms for companies to follow. Also recommended are a greater proportion of external directors on boards.


Governance is gaining ground

Historically, Japan has not prioritised corporate governance and shareholder rights, a stance that is becoming less acceptable. The percentage of companies with at least one outsider on the board of directors increased to over 70 per cent last year, from around 45 per cent in 2008. High profile scandals (e.g. Olympus) have had an effect. However, the changes have been as much due to the new Stewardship and Corporate Governance codes. The latter follows the practice in Western jurisdictions of ensuring companies meet minimum standards. One hot topic is cash. More Japanese institutional investors are voicing their discontent with dividend policies, which has led to more engagement with management. The latest prime ministerial thrust is to make companies produce better returns.


The best companies are adaptable

We generally prefer companies with proper business models, sound balance sheets and an ability to execute. Of course, we have holdings where the pace of change could be faster and where shareholder engagement is poor, even though the company might appear to be doing the right things. What these holdings have in common is a proven ability to adapt, whether to changes at home or abroad.


Cheaper than other markets

Japanese equity valuations today are still inexpensive on an absolute basis: the Topix index is trading below its seven-year average on forward price-to-earnings. US and European stocks are dear by comparison. True, Japanese companies are generally not investing enough, reflecting the poor state of domestic demand. Instead, Japanese companies have reduced debt. The problem, therefore, is too much corporate cash and too few investment opportunities. If Abenomics comes good, clearly that could change. Even if it does not, we think Japan is past its prolonged state of “muddle through”.

So, while the cherry blossom is replete with symbolism, it is the green shoots of recovery elsewhere in the world that will lift the country. As it is, there are plenty of Japanese companies doing just fine.

Hugh Young is head of Asia Pacific equities at Aberdeen Asset Management 



Annuity rates plummet to lowest level since 2012

Standard annuity rates have fallen to their lowest levels since November 2012, with the pace of decline increasing since the turn of the year, according to data published by Moneyfacts. The rate payable for an average single-life standard annuity for a 65 year old with a £10,000 pot has fallen by 5.9 per cent in […]

Jane Cuthbertson

Ten tips for being a successful networker

Networking is a crucial part of developing referrals and opening new doors. Indeed, many advisers we work with are building profitable businesses almost solely on referrals. Building a referral network is a great way to find new clients and prospects. However, contrary to popular belief, networking is not about trying to sell your services to […]


Lib Dems would allow councils to double tax on second homes

The Liberal Democrats is to announce plans to give local authorities power to double council tax on second homes. The announcement comes as part of a “Countryside Charter” unveiled today in Cornwall by Lib Dem leader Nick Clegg. The Lib Dems hope that by allowing councils to charge up to 200 per cent council tax, […]

9 October thumbnail

Johnson Fleming set to host webinar on auditing auto-enrolment schemes

With 23 auto-enrolment compliance notices issued by the Pensions Regulator, and an evolving legislative landscape meaning previously compliant schemes may now be in breach of regulation, now is the time to think about auditing your auto-enrolment scheme. Johnson Fleming is hosting a webinar on 9 October at 11:00 on how to audit your scheme to ensure compliance, avoid breaches and fines and overcome data issues.

Global energy: positioning for a recovery in the oil price Š

Richard Hulf explains how he and John Dodd have positioned the Artemis Global Energy Fund and where they are finding opportunities. Richard explains how he and John are changing the complexion of the fund to focus on the most efficient oil producers. As he tells journalist Alexis Xydias, in this environment of lower prices, he […]


News and expert analysis straight to your inbox

Sign up


    Leave a comment


    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm