Weak domestic economic growth, deflation, banks' bad loan problems, restructuring and slow implement...
Weak domestic economic growth, deflation, banks' bad loan problems, restructuring and slow implementation of reforms are just some of the problems in Japan and many fund managers are expecting more of the same.
However, amid the results season there appears to be a number of companies that have been restructuring and so have announced encouraging results.
David Mitchinson, manager of the £8m Framlington Japan fund, says: 'We have seen strength in particular from Canon and auto parts companies, most notably Honda and Nissan.
'However, Sony has been very weak and the company's strategy is being questioned. The general feeling is that nobody quite knows what products Sony is investing in. Everyone is aware it is a successful games and electronics business but they are unable to identify any existing product to suggest the next driver that will see this company go forward.'
According to Mitchinson some Japanese companies have finally recognised the need to change and are taking steps to improve. 'The market has been focused on good results and companies with good fundamentals and those on reasonable valuations will continue to perform well,' he says.
Mitchinson says there have been attempts to talk the market up but although the Bank of Japan has eased monetary policy this does not represent a major change. 'The government is resisting recognising what the real problem is ' which is that the banking system is broken,' he concludes. 'They are willing to talk the market up but are not doing anything about it.'
Natasha Chetwynd, head of Japanese equities at Britannic Asset Management, points out that while many market commentators are saying there is not much earnings growth at present, the consensus is that earnings growth should be 15% or more next year.
'Companies are buying back shares and we expect that to continue,' she says. 'There are certainly opportunities in some companies which are on cheap valuations. There has been a strong restructuring momentum for the past few years and last year's results were boosted by strong export growth.'
Chetwynd also highlights the importance of recent changes to Japan's pension regime, which has seen the government offering to manage pensions assets that had been the responsibility of individual companies. This in itself reverses a policy switch some years back but could ultimately provide a boost to equity markets.
'We are seeing pension handovers back from companies to the government either in the form of cash or index funds,' she explains.
'Companies have been keen to return their pension assets and, while they can give back stock, most are returning cash. The government is then able to reinvest it.'
Schroder Japan Smaller companies manager Naoki Suzuki is confident the Japanese market will return to growth, and currently favours companies with steady growth prospects and attractive valuations.
While such stocks have been a negative for performance over the past few months, he does not expect this to continue through the second quarter, he says.
Some corporate results encouraging.
Earnings growth expected to be 15%.
Companies buying back shares.
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