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Value in japan

Will Henley reports that market commentators believe Japanese equities really could see a sustained resurgence this time

The world’s second-biggest economy is an investment enigma. Japan has been tipped time and time again for a market upsurge in the past decade but it has failed to produce consistent performance.

Hargreaves Lansdown investment manager Ben Yearsley says: “There have been so many false dawns. The country looks like it is coming out of recession and on to a growth track and then it all goes wrong again. It has been continually doing that. Investors flock to Japan and end up getting their fingers burnt. Over the last ten or fifteen years there has been a lot of finger-burning.”

Invesco Perpetual Japan fund manager Paul Chesson says optimism was high at the start of 2006 based on impressive growth during 2005 but last year turned out to be flat. He says: “The past 18 months have been a disappointment as the economic fundamentals have steadily weakened. Japanese exports remain strong but domestic wages and spending have been very disappointing.”

In September, gross domestic product fell by 0.6 per cent on August, with domestic and external demand on the slide, according to the Japan Centre for Econ-omic Research, an indepen-dent research institution. It says corporate capital investment declined by 0.9 per cent after four successive months of increases.

The political climate has been troubled, with prime minister Shinzo Abe forced out in September after scandals and political pressure. Opposition Democratic Party of Japan leader Ichiro Ozawa also resigned two weeks ago leading to more turmoil although economic policies have remained largely unaffected.

Yearsley says: “It has been a torrid time politically but most analysts say it does not matter who is in power.”

Some analysts are positive about Japan’s prospects.

Yearsley last month bought into the Melchior Japan opportunities fund. He says he is impressed by reports of Japanese companies and the public buying into domestic equities in strong numbers. He says: “This suggests that Japanese investors think shares are undervalued.”

Schroder Japan Alpha Plus fund manager Nathan Gibbs says there are a wealth of investment opportunities in the country. He accepts that performance over the last year has been a letdown but believes Japan is slowly emerging from deflation and anticipates that firms could deliver aggregate earnings’ growth of 10 per cent this year and next.

Gibbs says Japan should be well insulated from the US property market problems and believes investors should be able to capitalise on undervalued stocks.

He says: “Overall, the recent share price falls in Japan have been excessive and although there has been some recovery recently, some excellent investment opportunities have opened up. The domestic economic picture remains broadly positive and, in many instances, Japanese stocks represent absolute value, with several trading at below their book valuation. Finding good value stocks in Japan at present is not particularly difficult.”

Yearsley says profits have been improving as companies have restructured, attitudes to employment have changed, and the management climate has altered. The result, he says, is that shareholder dividends have improved markedly.

He says: “Full employment used to be the norm in Japan. There was a kind of social stigma attached to being made redundant, as well as having to sack staff. Shareholders came third in the pecking order behind the public and employees but that seems to have changed.”

However, there is still a quandary. Chesson says there is a question mark over whether the credit crunch will affect Japanese growth and investment. He says: “The key question is, will the credit crunch have a negative impact on emerging markets and Japanese exports?”

Yearsley says the increasing prosperity of emerging Asian countries, most notably China, means consumer goods exports from Japan should remain strong. He says: “As these countries become more affluent, demand for items such as electronics, where Japan is a leader, will rise.”

He says Japan is always a risk and there is a danger it will slip back. “But everything added together, it looks like a good buying opportunity,” he concludes.

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