The Japanese economy is well positioned to benefit from any upturn in the global economy, accordin...
The Japanese economy is well positioned to benefit from any upturn in the global economy, according to Denis Clough, manager of the Schroder Tokyo fund.
Clough says long-term structural change in Japan has reduced first-half costs for Topix non-financial companies by 25% compared with 2001, so any recovery in earnings will feed straight through to profits.
Furthermore, the equity market looks cheap, with dividend yields rising above bond yields, he notes. Many Japanese companies currently have yields in excess of benchmark 10-year bonds, which has historically preceded a period of strong relative equity outperformance, according to Clough.
However, as a major importer of oil, Japan is economically sensitive to big moves in oil prices and if war in the Gulf were to drive prices significantly higher, it would raise costs for Japanese companies and have a negative effect on growth, Clough says.
'The main impact of a prolonged war would be the negative effect it would have on global demand and therefore demand for Japanese exports,' he adds. 'Clearly, though, Japan would not be alone in suffering under such circumstances.'
Paul Chesson, Japan fund manager at Invesco Perpetual, says while there is long-term bull story for Japan, a lot of work must still be done.
The Japanese economic agencies seem paralysed, he adds, and there is nothing to suggest an imminent policy change that could end Japan's deflationary cycle.
'It is hard to say when will be the time to buy equities until the economy begins to improve,' Chesson says. 'The recent rise in the yen only makes deflation worse.'
Chesson is currently only adding value through individual stock selection as he sees no major themes in the market.
He says: 'Japan needs policy incentives if it is to get out of this deflationary spiral. No amount of corporate behaviour will change the outlook for the stock market.'
Kerry Goh, manager of Govett's Japanese Opportunities fund, says: 'We are faced with mixed signals from Japan. On the macro side, the situation with Iraq and the global climate continues to disappoint.
'We also find the appointment of Mr Fukui as the Bank of Japan's new governor disappointing, as he is unlikely to introduce the creative measures so much needed to re-inflate the moribund economy.'
However, Goh is confident the short-term financial risk is already easing as a result of aggressive fund raising by major banking groups and the Japanese Financial Services Agency's softening stance towards banking regulation. He says: 'We are pleased to discover during company visits in February that corporate profits are still showing positive trends as a result of the restructuring efforts over the past two years. These are coming through on the bottom line.'
However, Goh adds, the trend of unwinding cross-shareholdings, together with the recent changes in the mechanism of pension schemes, are likely to keep pressure on the Topix Index.
He says going forward all eyes will be on how the BOJ's new team can deliver policies to regenerate the economy. On a micro level, he will be watching how corporates can continue to deliver profit growth under depressing sales conditions.
Costs down for Topix non-financial firms.
Firms have yields above 10-year bonds.
Corporate profits still show positive trends.
Policy agencies seem paralysed.
Rise in the yen only makes deflation worse.
Prolonged Iraq war negative for growth.
Consistency and compliance vs. slower reaction time
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