Jacob de Tusch-Lec says that with the Bank of Japan abandoning its policy of negative interest rates and corporate reforms finally becoming a reality, now could be time for investors to raise their exposure to this long-term underperformer.
You may not have heard of him, but Takerufuji Mikiya is Japan’s latest hero. Last month, roared on by a packed crowd at Osaka’s Edion Arena, he became the first top-division debutant in more than a century to win a sumo tournament. His unlikely triumph was swiftly hailed as the dawn of a new era for Japan’s national sport.
Sumo is probably what most people think of when they hear the words ‘overweight’ and ‘Japan’ used in concert. After all, Takerufuji tips the scales at around 22-and-a-half stone – which is almost dainty by rikishi standards.
‘Overweight Japan’ also has meaning in the sphere of investment, of course. Here, too, there is a sense that things are changing.
In the Artemis Global Income Fund, we currently have almost 20% in Japanese stocks – the most we have ever held and more than three times the benchmark’s weighting1.
Rates and reform
There are several reasons why a market that has been out of favour for some time now merits more attention. Japan’s long-awaited abandonment of negative interest rates may be the most symbolic milestone. It is the end of an era where the Japanese economy and equity market have been in retreat, especially on a relative basis against China and the US.
The Bank of Japan was the last central bank to cling to ultra-loose stimulatory monetary policy. It finally deigned to fall in line with the rest of the world on 19 March, with governor Kazuo Ueda declaring its measures had “fulfilled their roles”. The rest of the world had moved on from negative real rates and there was little point being left behind.
A lengthy period of deflation finally seems at an end. Some workers have been handed Japan’s heftiest pay rises since the early 1990s, while more businesses are passing on the costs of inflation to consumers.
In tandem, the promise of genuine corporate reform is at last becoming a reality (I know, we have heard this one before, but this time it might be different). Tougher governance and stewardship codes are compelling Japanese firms to better align their policies and practices with shareholder interests and place more focus on board accountability.
Despite appearances to the contrary, this has seldom been the case in the past. Corporate scandals and poor performance have brought high-profile apologies and even resignations but little significant change.
Now the Japan Exchange Group, which controls the Tokyo and Osaka stock exchanges, plans to name and shame companies that fail to meet standards designed to lift corporate value. Boards are taking action to reach double-digit returns on equity and in turn be rewarded with a proper price-to-book multiple from shareholders.
Currency and opportunities
The big question for many investors is whether to hedge the currency risk. The weakness of the yen is clearly an issue. Just three to four years ago, 100 yen would buy one US dollar; today that figure is above 150. For an economy relying on imports of most metals and energy sources, this is clearly inflationary.
