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The mane chance

The day before Jupi- ter launched its Japanese income fund, prime mini- ster Junichiro Koizumi won the Japanese election with a surprising majority.<

With Koizumi focused on reforming the economy, is it time to look again at opportunities in Japan?

Floppy-haired Koizumi, whose nicknames in Japan include Lion King and Maverick, called a snap election after his defeat in the Japanese parliament over a motion trying to push through privatisation of the postal service.

He campaigned on the basis that Japan needs to endure difficult changes to safeguard future prosperity and won 327 out of 480 seats, securing the first single- party majority in Japanese politics for over 15 years.

Tilney chief economist Peter Bickley thinks that by winning a renewed mandate from the electorate, Koizumi will be able to pursue a cleaner package of labour reforms. The move has been described as his “Clause 4” moment.

Bickley feels that this will be important both in its own right but also because of its impact on Japanese domes- tic confidence, potentially buoying up equities.

He says: “Postal privatisation may sound somewhat arcane but it is important in its own right and symbolically. For investors, while the risks must not be ignored, the election outcome is very positive.

The rise in the stockmarket to date has been overwhelmingly foreign-driven. In the wake of the election result, I expect a big boost to consumer and investor sentiment, with beneficial implications for stock prices.”

New Star economist Simon Ward is less positive about Koizumi, saying his plans remain hazy and any new initiatives will face oppo- sition from entrenched interests within his own party and the civil service.

Ward thinks the case for Japan is based not on likely government actions but on corporate restructuring. He says: “Companies are generating high levels of cash, which they are beginning to spend on increased investment and hiring. This raises the possibility of a virtuous circle, whereby rising labour demand boosts household incomes and consumption, further lift- ing output and profits.”

It seems the stimulation of domestic demand and consumption by big busin- ess is key to the country’s prospects. Collins Stewart investment manager Justin Oliver says in the wake of the election, Japanese economic growth was revised up to an annualised 3.3 per cent from 1.1 per cent.

Oliver says: “The fact that growth is being stimulated by domestic investment and consumption and not purely foreign trade is an encouraging development.”

Baring head of Japanese equities Joji Maki says while many short-term investors in Japan may start to take profits in the wake of the victory this should be looked at as an opportunity to increase long-term exposure.

Maki says: “Month by month, the fundamentals continue to improve, with corporate profits rising, deflationary pressures easing and with a reform-minded government newly returned to power. The turning point for the market will be when domestic confidence imp- roves to the point where domestic investors buy the Japanese equity market again. There is a wall of money waiting to be invested and when it is unleashed the effect on the market could be dramatic.”

Jupiter’s income fund has been created on the basis that ageing Japanese domestic investors are starting to demand income for their pensions. Companies not previously known for paying dividends are undergoing what manager Simon Somerville describes as a sea-change in their attitude to paying money to shareholders.

They are also nervous of being taken over and are keen to keep shareholders happy. Somerville’s fund is targeting a 2 per cent yield in the first year. He says a change in dividend culture could boost equities substantially and feels valuations are already lagging behind reforms made by Koizumi over the last four years.

Somerville says: “Japanese growth has largely tracked the global economy over the last four years. Koizumi’s reforms have been positive but the stockmarket has not been good to him and the valuations of Japanese companies are now compulsive. There are private equity boys all over the country and there is going to be a lot of M&A activity over the next few years.”

Hargreaves Lansdown head of research Mark Dampier is not convinced that retail investors go after a country because of macro views. He says fund of fund managers might do so but retail investors are likely to go for a fund because a manager starts to put in some really good performance.

Dampier says: “I think people are going to take some convincing on Japan because it has had a bear market since 1989. People gradually might get some nerve back but the best-selling fund is likely to be the one with the best numbers, so we will need to see some performance coming through. It is possible that stories about the political situation might draw investor interest.”

Dampier feels that the JPMAM Japanese fund run by David Mitchinson looks promising and he likes the Legg Mason Japanese fund too, although he describes it as “punchy” because of its higher risk. For a solid performer, he likes Malcolm Rose’s fund at Schroders.

Over five years, the best performing fund in the Asia Pacific including Japan sector is Hugh Young’s Aberdeen Asia-Pacific fund with a return of 37.2 per cent but the average fund is down by 4.2 per cent.

Over one and three years, there has been a turn-round in the sector, with the average fund up by 20.8 and 42.4 per cent.


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