By Jonathan McClure, head of Japanese equities at Royal London Asset Management There seem so ma...
By Jonathan McClure, head of Japanese equities at Royal London Asset Management
There seem so many adverse elements to the Japanese economic and investment scene at the moment that it seems futile at times to even contemplate making a rational case for suffering further.
Die-hard sceptics should be warned that although there are residual problems at the corporate level, there is now increasing evidence that legions of listed companies are restructuring balance sheets, cutting operating costs, reducing the size of their boards and changing business practices.
This has been forced by tougher accounting standards. Japanese managers are now recognising shareholder requirements and turning from a focus on market-share to one of profitability, introducing a more progressive dividend policy and share buy-backs.
It is so fashionable to deride this market that we blind ourselves to any recovery potential. It is not if the Japanese economy will recover, but when, and the same will be true of the stock market.
Recently, investors have needed to juggle an increasing number of balls with scant (if any) prospect of real returns. The negative effect of a weakening yen on unhedged portfolios can often only be compensated for by returns on export-led manufacturers, but a degree of faith is required to assume sufficient near-term demand amid the current global economic downturn.
Domestically, prime minister Koizumi, although earnest in his aims at fiscal and systemic reform, is coming under increasing international pressure to act more quickly. Intense deflation, rising unemployment, an insolvent banking system and an incurable reliance on government debt are a poor environment in which to overturn entrenched practices. But overturning them they are.
The weaker yen is a catalyst for change. In the 1990s, the strong yen forced export companies to restructure. Overseas manufacturing was raised but it has taken the domestic crisis to close local capacity. Now, with a weak yen, uncompetitive domestic businesses must now tackle deep-rooted problems so that profitability can soar when the economy recovers.
From a portfolio perspective, there are numerous approaches we must take. Even with the current malaise, Japan's auto companies are piling on the pressure. Toyota and Honda are among our biggest holdings and are justifiable on any global valuation comparison.
Now that Japan has largely abandoned commodity semiconductors, its competitive strength lies in provision of custom and passive electronic components.
Buying shares in companies that are among the world's best remains a successful approach but there are other factors to consider.
A zero interest rate policy, negligible bond yields and deflation at more that 1% makes the 2.5% dividend yield available from the electric utility companies attractive. This is one sector that has started to attract even Japanese retail investors.
With the Japanese market standing at near 20-year lows, there are myriad investment opportunities for the bolder investor with a longer time horizon. Buying speciality chemical companies, niche engineering plays and globally oriented pharmaceutical or medical equipment makers will provide a sure long-term return.
Corporate balance sheets are far cleaner.
Government to replace management at banks.
Weak yen is positive for exporters.
Selling of cross holding will hold market down.
Unemployment leads to weaker consumption.
The political will to reform may falter.
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