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
  • Get to the point
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

    Ashdown Group: Editor-in-chief - Financial Services - City, London

    £60000 - £70000 per annum + benefits : Ashdown Group: A highly successful, glo...

    Guru Careers: Pricing Analyst

    £30 - 35k (DOE): Guru Careers: We are seeking a Pricing Analyst with experienc...

    Ashdown Group: Treasury Assistant - Accounts Assistant - London, Old Street

    £24000 - £26000 per annum + benefits : Ashdown Group: A highly successful, glo...

    Ashdown Group: Sales Team Leader - Wakefield, West Yorkshire

    £21000 - £24000 per annum: Ashdown Group: The Ashdown Group has been engaged b...

    Day In a Page

    Revealed: Why Mohammed Emwazi chose the 'safe option' of fighting for Isis, rather than following his friends to al-Shabaab in Somalia

    Why Mohammed Emwazi chose Isis

    His friends were betrayed and killed by al-Shabaab
    'The solution can never be to impassively watch on while desperate people drown'
An open letter to David Cameron: Building fortress Europe has had deadly results

    Open letter to David Cameron

    Building the walls of fortress Europe has had deadly results
    Tory candidates' tweets not as 'spontaneous' as they seem - you don't say!

    You don't say!

    Tory candidates' election tweets not as 'spontaneous' as they appear
    Mubi: Netflix for people who want to stop just watching trash

    So what is Mubi?

    Netflix for people who want to stop just watching trash all the time
    The impossible job: how to follow Kevin Spacey?

    The hardest job in theatre?

    How to follow Kevin Spacey
    Armenian genocide: To continue to deny the truth of this mass human cruelty is close to a criminal lie

    Armenian genocide and the 'good Turks'

    To continue to deny the truth of this mass human cruelty is close to a criminal lie
    Lou Reed: The truth about the singer's upbringing beyond the biographers' and memoirists' myths

    'Lou needed care, but what he got was ECT'

    The truth about the singer's upbringing beyond
    Migrant boat disaster: This human tragedy has been brewing for four years and EU states can't say they were not warned

    This human tragedy has been brewing for years

    EU states can't say they were not warned
    Women's sportswear: From tackling a marathon to a jog in the park, the right kit can help

    Women's sportswear

    From tackling a marathon to a jog in the park, the right kit can help
    Hillary Clinton's outfits will be as important as her policies in her presidential bid

    Clinton's clothes

    Like it or not, her outfits will be as important as her policies
    NHS struggling to monitor the safety and efficacy of its services outsourced to private providers

    Who's monitoring the outsourced NHS services?

    A report finds that private firms are not being properly assessed for their quality of care
    Zac Goldsmith: 'I'll trigger a by-election over Heathrow'

    Zac Goldsmith: 'I'll trigger a by-election over Heathrow'

    The Tory MP said he did not want to stand again unless his party's manifesto ruled out a third runway. But he's doing so. Watch this space
    How do Greek voters feel about Syriza's backtracking on its anti-austerity pledge?

    How do Greeks feel about Syriza?

    Five voters from different backgrounds tell us what they expect from Syriza's charismatic leader Alexis Tsipras
    From Iraq to Libya and Syria: The wars that come back to haunt us

    The wars that come back to haunt us

    David Cameron should not escape blame for his role in conflicts that are still raging, argues Patrick Cockburn
    Sam Baker and Lauren Laverne: Too busy to surf? Head to The Pool

    Too busy to surf? Head to The Pool

    A new website is trying to declutter the internet to help busy women. Holly Williams meets the founders