Invesco Perpetual and JP Morgan Fleming find plenty of good news in market
Invesco Perpetual's Paul Chesson has called the start of a bull market run in Japanese equities.
Against a backdrop of government and corporate restructuring, Japan is finally ready to break out of long-term recession, Chesson claimed.
He said: 'The Japanese market is changing more rapidly than it is given credit for in the west and it is the germinating seed of a bull market.'
Speaking at last week's Investment Week Market's Forum in London, Chesson said he believes the basis for improved sentiment on the outlook for Japanese lies in the widespread improvement of corporate profitability on the back of major restructuring.
'The Nikkei is currently trading in the mid-12,000 range and companies are now more profitable than in 1989, when the market was trading at 39,000, which shows how overvalued it was then,' Chesson said.
'The growth in corporate earnings as a percentage of the economy is rising, so the stock market can rise, which has been seen in both the UK and the US.
'This process has just begun in Japan so the question is whether it is going to go further and be sustainable.'
While Chesson acknowledges the significance of prime minister Junichiro Koizumi's landslide victory as a stimulus for change, he also noted the importance of the accountancy reforms, pushed through Koizumi's predecessor, prime minister Hashimoto.
'Hashimoto brought in the accountancy reforms and by this summer, accountancy standards in Japan will come in line with international standards,' he said. 'Now we have a prime minister who his closest adviser, the finance minister, likens to Margaret Thatcher. We do not know if he can deliver or if the political old guard will re-emerge to become a threat, but the will to change is now there.'
Richard Cardiff, Japanese fund manager at JP Morgan Fleming Asset Management, is also bullish about the prospects of recovery in Japan but recognises that massive restructuring is required throughout the whole economy, which is likely to lead to short-term suffering.
'Within the ruling LDP party, there are some noses out of joint, so to bring in reforms, Koizumi will need support,' Cardiff said.
'Fiscal reform is needed and we need to look out for the replacement of the current Governor of the Bank of Japan, which could lead to someone more supportive coming in.'
The yen will be hit by these measures, Cardiff predicted, but he believes this should act as an economic stimulus.
'All of these factors lead to the yen. The yen is likely to weaken from its current levels of ¥125 against the dollar and move up toward the ¥130-135 range,' he said.
'The fiscal stimulus and weak currency will help infuse some growth into the economy that is desperately needed.'
The strength of the prospect for genuine change is leading fund managers to cut their underweight positions in Japan as the risks of neglecting Japan begin to outweigh the rewards, Cardiff said.
'The market could possibly move up to 17000 by the end of the year and although people are not yet going overweight, they are cutting their huge underweight positions,' he added.
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