As disappointing Q2 GDP figures weigh on the Nikkei, Rebecca Jones asks three advisers whether they think Shinzo Abe can still pull Japan out of the doldrums.
Jason Hollands MD, business development, Bestinvest
The Japanese market got a little ahead of itself in the first half of the year. In particular, there was a big boost from the devaluation of the yen but we have seen a lot of yo-yoing in recent weeks, which has had an impact on stock prices.
Part of that is down to fears regarding the slowdown in China, which has caused a lot of money to flow into the yen.
However, it is important to remember that, even though the yen has strengthened, it is still materially below where it was 12 months ago. Japanese companies exporting to the US still look competitive.
We are positive on Japan but that initial flurry from the devaluation of the currency has played out. Now it is about seeing whether or not government policies are having a material impact at the company level.
Is Japan’s recovery on the rocks?
Japanese companies are still, arguably, undervalued; on average, they are trading below book value. Meanwhile, there has not been a huge wall of money through Japanese markets and local institutions still have quite low equity weightings.
Japanese pension funds only have a 10% equity allocation so even a fairly modest shift could give quite a boost.
Markets are fretting about when the US Federal Reserve might start tapering, which has had a knock-on impact in Japan. Unsurprisingly, the market that rose the most over the last year is the one that has proved most volatile as we have gone through a frothier period.
A more competitive currency against the US dollar is a key thing to watch out for.
Ben Gutteridge Fund analyst, Brewin Dolphin
We retain a constructive view on Japan but recognise wobbles in almost every area of Abe’s three arrow reform programme.
Monetary efforts seem to be pausing for breath as the Bank of Japan (BoJ) has decided to keep quantitative easing where it is; in terms of the fiscal situation, while people recognise the level of debt in the economy, they are nervous about implementing fiscal discipline too quickly; and on economic reform, there is a lot of rhetoric that is light on implementation. Quite understandably, investors are spooked.
However, we can draw positives on all fronts, certainly on the fiscal side. It has been ratified by parliament that consumption tax will go from 5% to 8% by April next year but Abe can alter the course of that.
He was not making much noise about softening the implementation of the tax but he has come up with a corporate tax cut, which could cushion the blow. People want to see fiscal discipline but they do not want to see the pace be too quick.
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