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Is japan back on track?

Nicola York finds there are rising expectations for the Japanese stockmarket after a decade and a half in the doldrums as a snap election over the future of the post office could help to deliver sustained economic growth

After 15 years in the basement, the Japanese market may finally be set for a sustained upturn.

Against expectations, the stockmarket has continued to rise since prime minister Junichiro Koizumi called a snap election following the parliamentary rejection of plans to privatise Japan’s postal system.

F&C director of Japanese equities Jamie Jenkins says the impact of the election on the macro-economic situation is hard to gauge but he does not think the outcome will have a long-term effect on the market. “The improvement in the economy that we have seen in the last 18 months has largely been driven by the private sector rather than the public sector so it seems to me that, against most people’s expectations, the market has rallied from the point at which Koizumi announced he was calling a general election,” he says.

The Nikkei 225 index has overshot Jenkins’ expectations. In January, he expected the market to be around 12,500 by the end of the year but it has already achieved this level. “From a technical perspective, I think 12,000 was a critical level and now the market has punched through that it is quite a bullish sight for investors.”

Support for Koizumi’s cabinet climbed to 49 per cent recently, the highest level since May 2004, according to a survey by Japanese business newspaper, the Nihon Keizai Shimbun.

Schroders head of Japanese equities and manager of the Tokyo fund Andrew Rose thinks that a coalition is the most likely election result and considers this would be the best outcome for the stock market. “The worst result for the stockmarket would be if no one gets the majority,” he says.

New Star economist Simon Ward says: “Japan’s economy has flopped more often than Tim Henman over the last decade but the current recovery is looking increasingly like the real thing.”

Credit Suisse joint head of multi-manager Gary Potter says: “We have seen this before time and again in the last 15 years – a false dawn. My view is that the sun actually might rise this time. In that context, an early nibble on a market that looks no worse than anywhere else, in fact, marginally better in some cases, might not be a bad idea.”

Potter thinks that more market-aware IFAs will probably be taking a fairly cautious view of Japan due to previous disappointments but he thinks Japan should not be looked at in the same context as it has been in the past 15 years or so. “Clearly, it had a lot of problems and those problems still exist but now they are known about and things are gradually being done to sort them out, so we are positive on Japan.”

But not everyone is optimistic. Bestinvest investment trust analyst Simon Moore believes the jury is still out on the Japanese market. “Everybody is waiting to see whether there is real domestic recovery within Japan and people still seem to be looking at consumer confidence because the actual figures in terms of consumer spending have not turned the corner yet,” he says.

Bestinvest’s model portfolio has a weighting of 5-7 per cent in Japan and, despite Moore’s reservations, he thinks a balanced global portfolio should show this weighting.

In light of the climate of uncertainty created by the election, Moore advises investors to think about a return to quality Japanese stocks rather than more volatile small and mid-caps. He says: “It would mean investors switching perhaps into the fund managers that have got more experience in the region rather than the ones who have just got on the crest of a small-cap wave, which is what happened in the last year or so.”

JP Morgan Japan fund manager David Mitchinson thinks that investors should look to domestic areas of the economy, such as retailing, real estate and some areas of capital investment-related spending, including financials. He says there are some great opportunities and cheap valuations because these areas of the economy have had an “awful time” over the past 15 years.

He says: “I think investors generally have a pretty low opinion of Japanese politicians and their ability to create and enact policy. That said, clearly a Koizumi victory is better in terms of moving the reform agenda forward than a victory for his opponents.” In general, he thinks that Japan is a long-term improvement story and he considers that the current trends of asset reflation, rising domestic efficiency and public sector reform will continue.

Martin Currie head of Japan team Michael Thomas says that although historically elections have had little impact on the stockmarket, this election is slightly different.

He says: “It might redefine politics slightly differently in Japan than in the past because people have been deselected to stand as LDP candidates for the very first time that I can remember.”

Thomas says the major buyer in the stockmarket at present is “the foreigner” and so what the foreigner thinks about this election is important in regard to the reaction of the stockmarket afterwards.

“The foreigner quite likes Mr Koizumi because he has this magic word ‘reform’ about him. However, it is very important for everyone to realise that his reform is about reform of government, not anything else,” he says.

If Koizumi is re-elected, Thomas thinks it will be seen as a generally positive result, but the impact either way will be marginal.

He says Japan’s major problem over the past few years has been price deflation and he believes that this will soon come to an end.


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