Is the sun rising on Japan – or is this just another false dawn?

'Abenomics' seems to be doing the trick for the second-largest economy after two 'lost decades'. Danielle Levy reports

Could it really be true, could Japan be back? After two "lost decades" the stimulus programme of Prime Minister Shinzo Abe, dubbed "Abenomics", nearly a year old, seems to be doing the trick, at least as far as investors are concerned. The Nikkei 225, so often the world's stockmarket poor relation, is up by a staggering 46 per cent since Mr Abe was elected. The UK's FTSE 250, by comparison, is up 26 per cent over the same period.

However, it is a journey that has hit some bumps along the way. This is best demonstrated by a 20 per cent market fall in late May after Federal Reserve chairman Ben Bernanke announced the US central bank's intention to end its quantitative-easing programme, sending global markets haywire. Since the sell-off bottomed on 13 June, the Japanese index has recovered by 8 per cent, with some taking the view that earnings can continue to grow.

The average Japanese equity fund is up 33 per cent since mid-December, while the Legg Mason Japan Equity fund has proved the best performer over the period with a staggering 80 per cent return for investors, followed by the Invesco Perpetual Smaller Companies fund which rose 65 per cent.

With these stellar returns in mind, has the easy money been made?

Ruth Nash, manager of the JOHCM Japan fund, says smaller companies with a domestic focus are the ones to watch.

"Although the first result of Abenomics has been to weaken the yen and boost the profits of exporters, ultimately it is a strategy designed to boost the domestic economy and domestic stocks, and these remain extremely undervalued," she says.

As a result, her fund is investing more than ever in small and medium-sized companies.

"Mid and small-cap stocks are where the extreme undervaluation can be found in this market. If, as we believe, this really is the start of a long-term bull market in Japan, then the market as a whole will re-rate. Large caps will perform well, but the performance of mid and small caps could be extraordinary," says Ms Nash.

Legg Mason Japan Equity manager Hideo Shiozumi, on the other hand, is targeting what he describes as companies of the "New Japan": those that can take advantage of opportunities with the elderly population, changes in the lifestyles of consumers and a broadening, internet-oriented economy.

For Andrew Wilson, head of investment at wealth manager Towry, much depends on whether Abenomics can genuinely reflate the Japanese economy. If this happens, the rally could be sustained and even those getting in now could make a killing. "There are many sectors and stocks with incredible upside," he says. "Banks would presumably be a good place to be.

"However, Mr Abe needs incomes, spending and investment to rise soon, as the negative impact of inflation is already being felt via high energy prices, for example."

But JPMorgan's market strategist Andrew Goldberg casts doubt on Japan's recovery. He points out that wages are still falling and national debt is roughly two and half times the level of the UK's.

But Abernomics isn't just about trying to get people spending. It is also about a dose of what could be called Thatcherism, but Japanese-style.

The notoriously inflexible Japanese labour market is to be overhauled, free-trade agreements entered into, and state enterprises privatised. This will be the major test, fund managers in the sector suggest.

"Like many I am deeply sceptical Japan can come up with meaningful structural reform, says investment director Michael Stanes of Heartwood Investment Management.

"We think the fundamental problems have not really gone away and we look at what has happened so far as a cyclical improvement rather than a structural lift-off."

He highlights immigration and the structure of the labour market as two obstacles.

"Everyone says Japan is very cheap. It is cheap if you believe in the sustainable improvement in returns – and we do not," Mr Stanes adds.

Jupiter Japan Income manager Simon Somerville is more upbeat, taking the view that the government's measures to support further investments and wage rises can help.

Given this complex backdrop, should Japan form a meaningful part of your portfolio?

Juliet Schooling Latter, research director at fund broker Chelsea Financial Services, says the time could be ripe for investors who are light on Japan to increase their allocation.

"The majority of UK investors will be underweight Japan, although global portfolios will have a higher weighting than they have had for many years," Ms Schooling says.

"For these people I think there is still enough of an opportunity to consider increasing this weighting a little."

She suggests the GLG Japan Core Alpha and JOHCM Japan funds as her top active fund picks.

Towry's Mr Wilson, on the other hand, highlights Schroder QEP Japanese Core fund, an enhanced index fund, as a cheaper way in which to gain exposure.

Whichever way you choose to invest, further bumps in the road will happen as the Japan goes through its great financial experiment.

Danielle Levy is a Citywire reporter

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at

Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Recruitment Genius: Compliance Manager

    £40000 - £60000 per annum: Recruitment Genius: A Compliance Manager is require...

    SThree: Talent Acquisition Consultant

    £22500 - £27000 per annum + OTE £45K: SThree: Since our inception in 1986, STh...

    Recruitment Genius: Experienced Financial Advisers and Paraplanners

    Negotiable: Recruitment Genius: This extremely successful and well-established...

    Guru Careers: FX Trader / Risk Manager

    Competitive with monthly bonus: Guru Careers: We are seeking an experienced FX...

    Day In a Page

    Seifeddine Rezgui: What motivated a shy student to kill 38 holidaymakers in Tunisia?

    Making of a killer

    What motivated a shy student to kill 38 holidaymakers in Tunisia?
    UK Heatwave: Temperatures on the tube are going to exceed the legal limit for transporting cattle

    Just when you thought your commute couldn't get any worse...

    Heatwave will see temperatures on the Tube exceed legal limit for transporting cattle
    Exclusive - The Real Stories of Migrant Britain: Swapping Bucharest for London

    The Real Stories of Migrant Britain

    Meet the man who swapped Romania for the UK in a bid to provide for his family, only to discover that the home he left behind wasn't quite what it seemed
    Cheaper energy on the way, but it's not all sunshine and rainbows

    Cheaper energy on the way, but it's not all sunshine and rainbows

    Solar power will help bring down electricity prices over the next five years, according to a new report. But it’s cheap imports of ‘dirty power’ that will lower them the most
    Katy Perry prevented from buying California convent for $14.5m after nuns sell to local businesswoman instead

    No grace of God for Katy Perry as sisters act to stop her buying convent

    Archdiocese sues nuns who turned down star’s $14.5m because they don’t approve of her
    Ajmer: The ancient Indian metropolis chosen to be a 'smart city' where residents would just be happy to have power and running water

    Residents just want water and power in a city chosen to be a ‘smart’ metropolis

    The Indian Government has launched an ambitious plan to transform 100 of its crumbling cities
    Michael Fassbender in 'Macbeth': The Scottish play on film, from Welles to Cheggers

    Something wicked?

    Films of Macbeth don’t always end well - just ask Orson Welles... and Keith Chegwin
    10 best sun creams for body

    10 best sun creams for body

    Make sure you’re protected from head to toe in the heatwave
    Wimbledon 2015: Nick Bollettieri - Milos Raonic has ability to get to the top but he must learn to handle pressure in big games

    Nick Bollettieri's Wimbledon files

    Milos Raonic has ability to get to the top but he must learn to handle pressure in big games
    Women's World Cup 2015: How England's semi-final success could do wonders for both sexes

    There is more than a shiny trophy to be won by England’s World Cup women

    The success of the decidedly non-famous females wearing the Three Lions could do wonders for a ‘man’s game’ riddled with cynicism and greed
    How to stop an asteroid hitting Earth: Would people co-operate to face down a global peril?

    How to stop an asteroid hitting Earth

    Would people cooperate to face a global peril?
    Just one day to find €1.6bn: Greece edges nearer euro exit

    One day to find €1.6bn

    Greece is edging inexorably towards an exit from the euro
    New 'Iron Man' augmented reality technology could help surgeons and firefighters, say scientists

    'Iron Man' augmented reality technology could become reality

    Holographic projections would provide extra information on objects in a person's visual field in real time
    Sugary drinks 'are killing 184,000 adults around the world every year'

    Sugary drinks are killing 184,000 adults around the world every year

    The drinks that should be eliminated from people's diets
    Pride of Place: Historians map out untold LGBT histories of locations throughout UK

    Historians map out untold LGBT histories

    Public are being asked to help improve the map