Jon Greenhill, manager of Royal & SunAlliance Japan growth fund, warns any progress could be hampered by poor government policy
RSA Investments believes there will be a cyclical upturn in Japan this year although adds that the market reaction to this could be overshadowed by a lack of government and corporate reform.
Jon Greenhill, manager of the Royal & SunAlliance Japan Growth fund, who has just returned from a trip to Japan, said that if any cyclical recovery is to be taken seriously by the market, it will have to be sustained through 2003.
He added that this scenario is heavily reliant on the performance of the US economy and the group remains cautiously optimistic.
But Greenhill added: 'Government policy has the ability to override the cycle. Major disappointment could lead to investors ignoring any economic improvement, while dramatic action could trigger a sharp rally. We feel that the Government will give the market enough to ensure a modest reaction to cyclical improvement but we are cautious that the risks on both sides to this central case are very considerable.'
He said financial conditions remain severe in Japan and added that the bad debt issue in the banking sector is critical and is having major knock-on effects for the whole economy.
Greenhill said: 'The day of reckoning is now not far away and real action is required. Again the risks are high and government policy is the key unknown factor. The Government looks unlikely to enact aggressive policy here and therefore we see little ability to make a structural case for Japan. Some solution is likely to be enacted and though insufficient may allow for additional breathing space.'
He said restructuring in Japan is progressing but that the headwinds against it are strong. Greenhill added that government action was needed for real structural improvement to be achieved but said this appears to be unlikely.
Greenhill added: 'For the equity market our belief in a second-half recovery remains, but there are considerable restraints that will prevent the market from achieving the 40%-76% rallies seen in past recoveries. Government policy is the wild card and must be watched very closely. We are not making a structural case for buying Japan but believe that enough will be done to ensure that the cyclical forces hold sway for a while.'
Greenhill said that domestic demand in Japan is likely to remain weak and that auto production is also likely to fall again in 2002. He added that technology products should see an improvement given the extremely low levels reached in 2001 while he remains sceptical on final demand for technology products and expects any production rebound to be modest.
He said: 'In the absence of domestic demand growth, Japan has had to look abroad for stimulus. This is unlikely to change. We believe that the US economy will provide sufficient stimulus to deliver a gradual improvement in momentum through 2002. This has the potential to surprise investors many of whom feel that Japan will this time spiral downwards with production cuts unable to keep pace with the retrenchment of end demand.'
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