We are positive about the outlook for Japan both this year and next. Several factors should allow GDP to rise to 0.9% this year and 1.8% next year before the next sales tax increase hits consumption in 2017. Lower energy bills will provide much needed relief to household finances and a boost to consumption. The external trade picture is improving with exports up 15% year-on-year. The BoJ QE programme will hold down interest rates, boost money supply, support asset prices and push down the ¥. While the BoJ is unlikely to hit its 2% inflation target this year, it should at least succeed in creating inflation.
Japanese equities have had a great start to the year. The Nikkei 225 is up more than 12% year on year and has reached a 15 year high in May of 20570. Unlike past rallies, this one has not been followed by significant further depreciation in the ¥. The Japanese market looks well supported by QE and is cheap compared to other markets. The Nikkei, even after significant gains, is still trading below its ten year average P/E ratio. Japan has been cheap on most trade measures for some time and for good reason. There are several forces that now should lead to positive long-term growth.
Government policy demands that the Japanese government’s pension fund need’s to invest tens of billions of ¥ into the Japanese stock market to comply with revised mandates. A quarter of the government’s pension fund must now be invested into the domestic equity market. Also the BoJ is expected to invest another US$25bn in QE programmes. The combined impact should be significant.
Given the lack of domestic energy resources, Japan’s energy imports are one of the highest amongst advanced economies. The reduced cost of oil to industry and manufacturing, as well as the domestic consumer, should drive down costs and increase consumption. Cheaper oil is therefore a tail wind behind Japanese equity growth.
There has been far too many past false dawns in Japan and this is the reason that for many years, we have not invested into a Japanese single country equity fund. Given the depth of the country’s structural reform that still has to be addressed, it is yet too early to call Abernomics a success. However, attractive valuations, earnings momentum and lose money provide a flexible environment for future growth in this market.