Fund manager's comment/Graeme Sinclair
If you held a popularity contest in Japan, the unanimous choice for winner would no doubt be Prime Minister Junichiro Koizumi. Having just led the Liberal Democrat Party to an easy win in the Upper House elections, the victory should bolster the already cult-like adulation surrounding the charismatic leader.
But what about Japan and its economy? While the LDP basks in the glory of the election result ' widely viewed as a referendum on Koizumi's ambitious reform plans ' the stock market has nose-dived yet again, this time to a 16-year low.
In tandem, the yen and government bonds have also suffered, as investors are spooked by a further slide in the country's industrial output. The weak industrial output data heightened concerns that the nation's GDP would contract further in the second quarter, which, after the first quarter drop of 0.2%, will put the nation in a technical recession, exacerbated by a deceleration in global growth.
The unemployment situation also looks bleak, with the jobless rate at a record high of 4.9% in June. The Ministry of Labour revealed there were 61 offers for every 100 jobseekers. Adding to the gloom was data showing that household spending, a key gauge of personal consumption, fell 3.3% year-on-year in June, its third straight month of decline.
The public has clearly pinned its hopes for recovery on Koizumi's reforms. His proposals include cleaning up the debt-ridden banking sector, putting a cap on the issuance of government bonds, privatising the postal service and applying the brakes on spending for public works projects. But, in the near term, these plans are likely to inflict more pain to the unemployed, meaning that the average consumer is likely to save even more. Can Koizumi deliver? Despite his victory, his hands are tied by the LDP's factional interests, who control policy. And he lacks a track record. The financial markets' negative reaction partly reflects concerns that another supplementary budget will be needed, coupled with worries of a spiraling deficit.
At the corporate level, however, there are reasons to be optimistic. Firms have begun to embrace the reform path by making efforts to contain operating costs and reward shareholders. Nissan Motors has led by example here, inspiring firms such as Asahi Glass. There is also a chance that return on equity ratios will improve in the medium to long term.
In terms of valuations, Japanese firms provide attractive opportunities, albeit with a degree of risk. Based on price-to-book and price-to-sales, the stock market is more attractive than the US or Europe. There is hope that the 'short-term pain, long-term gain' agenda will eventually work, paving the way for structural improvements in the economy. We are positive on Japan on a medium- to long-term perspective.
Graeme Sinclair is investment director of Aberdeen Asset Management
• Election bolsters Koizumi's reforms.
• Firms making effort to contain costs.
• Japanese stocks look attractive long term.
• Stock market fallen on economic fears.
• Economy is in technical recession.
• Koizumi restricted by LDP interests.
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From 6 April 2019