Fund managers are divided on which way the Japanese economy will turn over the coming months. Ed Mer...
Fund managers are divided on which way the Japanese economy will turn over the coming months. Ed Merner, adviser to the Atlantis Japan Growth fund, believes the Japanese stock market will rise on the back of increased domestic confidence. He says: "Over the past few years the domestic investor has been wary of the Japanese market and has chosen to invest abroad. This looks set to change as positive economic signs continue to increase. Confidence should be restored, encouraging the markets to pick up. This return to domestic investment, which will be accelerated by any corrections in markets such as China and India, is the catalyst to a rising Japanese stock market."
Merner says consumer spending is likely to rise because of higher employment, an increase in wages and bonuses, and possibly the end of asset deflation. As a result, Merner has focused his portfolio on smaller and medium-sized companies which have relatively high exposure to the domestic economy.
Chris Taylor, head of research and manager of the Neptune Japan Opportunities fund, takes a different stance and is underweight stocks that depend on the domestic environment such as banks, financials and consumer stocks.
Taylor predicts little change in the foreseeable future because of the stale political environment. He says: "The political situation is laughable but nothing is going to change for a while. Japan has a lame duck prime minister who is dependant on a coalition partner and the opposition not creating too much trouble. In an ideal world the government would be sorting out deregulation, cutting down on borrowing and would redirect funds towards the healthcare system and pensions."
Taylor also says demographic issues don't help. "Demographically, we have a large amount of older people retiring, younger people taking over and being paid less," he explains. "That prevents consumer spending from picking up."
Another issue is the work environment. Although quot-ed companies in Japan have seen strong profit growth, Taylor says two thirds of the Japanese workforce is employed in companies that have ten or less workers. Such companies have seen no improvement in profit and so wages have not risen.
He adds: "Ultimately Japan hasn't got a problem but it is too dependant on exports and the weak yen continues to drive that. I've just concentrated on the sectors where Japan dominates, such as the production of carbon fibre or construction machinery. Whether those companies are exporters or not isn't strictly relevant. What is relevant is that they control the market for their product. They are in a global sector and they dominate."
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