Japan's tack holding firm
The re-election of prime minister Shinzo Abe in October last year is certainly a strong message that ‘Japan Inc.’ is back.
It also demonstrates that the close collaboration between government, bureaucracy, the BoJ and the labour unions is working in the right direction, and that consistency and patience are needed to obtain the economic, structural and social improvements that the country will need to continue its path of long-run success.
Along with firmer global growth, ongoing structural reforms should provide further support. Take Japan’s tourism boom, for instance. The government’s decision to ease visitor visa rules, particularly for Asian tourists, has helped fuel a tourism boom. In 2014, the government set a target of 20 million inbound tourists by 2020. That goal was met in 2016 – and has since doubled to 40 million. The surge in inbound tourists and their shopping sprees have been a boon to consumption.
Other signs of progress include corporate governance and labour market reforms. This should lead to better corporate management and capital allocation, and hopefully more capital investment in the economy. In the labour market, it is promoting “equal pay for equal work” to narrow the wage gap between regular and temporary workers. It is also encouraging greater utilisation of female, elderly and foreign workers. These measures should increase the supply of labour in the economy.
As a result, Japan has been enjoying the biggest increase in earnings growth of any major stock market in 2017, indicating that Japan still offers an attractive risk/return trade-off.
Another cause for optimism is that earnings growth is increasingly coming from domestic-orientated firms, which should make the Tokyo Stock Price Index (TOPIX) become much less dependent on moves in the yen-dollar exchange rate, going forward. Overall, we expect further potential improvement in valuations, plus earnings upgrades, to drive the domestic stock market gradually higher.
Targeted measures introduced by the Abe administration have helped to raise productivity across different sectors. We see clear signs that the government is looking to spur innovation in areas such as artificial intelligence, factory automation and medical research. As a result, our team looks for companies that are expected to grow on the back of cyclical demand. Similar to smartphones, personal computers and many home electronics and industrial equipment, autonomous vehicles are becoming part of the ecosystem of connected devices known as the Internet of Things.
Our portfolio holds selected car makers but managers prefer to invest in the beneficiaries of the structural changes in the industry, which tend to be more profitable. These include firms that specialise in data communication technology and security, sensor makers and semiconductor companies. Based on recent results, the machinery, electric appliances and retail trade sectors were sizeable contributors to portfolio results and represent an important element of our positioning as we head into 2018.
Christophe Braun is an investment specialist at Capital Group
