Stay cautious on Japan
It’s been another interesting month in Japan. A surprise decision to increase the size of the central bank’s quantitative easing programme coincided neatly with the move by the vast Government Pension Investment Fund (with in excess of US$ 1trillion in assets under management) to boost allocations to equities, both domestic and international, at the expense of its holdings in government bonds. In addition, Prime Minister Abe has called a snap election, as he seeks a popular mandate to push back a scheduled increase in consumption taxes.
Capital markets have been jolted into action; the yen has sold off relative to the currencies of its major trading partners and equities have soared in local currency terms. Investment strategists the world over are advising clients not to fight the central bank – has the time come to make an active recommendation on Japanese equities?
As regular readers will know, we’ve long thought that the post-2008 obsession with monetary and fiscal policy, as well as banking systems, across much of the developed world may have obscured the role played by micro-economic factors, particularly in Japan’s case. Of all the measures so far tried by Japanese authorities to jumpstart the economy, bottom-up reform and liberalisation have as yet been substantially absent. The Japanese equity market will remain a place where, most of the time, benchmark-aware investors should simply aim for a neutral position. Japanese equities will look mispriced if the corporate sector achieves the same level of profitability as its developed market counterparts, however, there remains much to doubt on this front.
We would urge investors not to underestimate the latent micro-economic factors at work, or the monumental effort it would take to change them. We have yet to see concrete evidence that the authorities are ready to embark on this path, even if the tentative steps mentioned in this article make us more comfortable recommending clients have at least some exposure to the region.