Is this really Japan's year to return to the light?

The recovery has been a long time coming, so what's different this time, asks Emma Dunkley

It may be known as the land of the rising sun, but Japan has seen many false dawns for investors over the past two "lost" decades. Yet now could be the time to buy into Japan, as the election of a new prime minister marks a potentially massive change in fortune for the stagnating economy.

There has already been a turnaround over the past three months, as funds investing in Japanese equities are up nearly 15 per cent on average and are among the best performing across all regions and asset classes. With the country being home to lots of world-class companies that are looking very cheap, it would seem an opportune moment to buy.

But those who have seen such signs of promise before remain wary of the notion that the country can actually overcome its problems and deliver for investors. So is it time to get excited about Japan in the expectation that it can finally offer compelling returns, or does the old caution still apply?

"Investing in Japanese equities has been a fruitless foray into an unforgiving frontier in the past two decades," says Tom Becket at the investment manager PSigma.

"You get less grief for investing in the likes of Bangladesh and Mongolia than you do for committing capital to Japan."

However, Mr Becket believes new policies at the Bank of Japan could spell positive times ahead for equities. He says companies in the country will see profit growth above 35 per cent this year, although he believes Japanese equities are not priced for such exuberance – meaning these shares are attractively cheap and ripe for the taking.

And it's likely the uptick in Japanese shares over the past few months will continue through to the summer at least. Andrew Rose, a Japan fund manager at Schroders, says: "In the coming months, Japanese shares will sustain the rally, because there's another election in July.

"Prime Minister Shinzo Abe is going to do all in his power to create a feelgood factor – so there will be a lot of positive news thrown at the economy between now and then."

But can Japan continue to rise beyond that point? "The chances of meaningful change are better than they have been for a long time," says Mr Rose. "They are better because of the political will and the likelihood of Abe staying in power for a number of years. It will mean he can take measures to address the country's problems and boost underlying growth."

One major pivotal factor that could really spur share prices is the authorities' strategy to weaken the currency. The yen has already fallen sharply since November, to its weakest level against the dollar in almost three years. "In effect, the yen should halve against the dollar from the 77 yen that we saw last year," says Mr Becket. "Even if that were to partially happen, Japanese equities should boom."

Weakening the yen will also boost exports, create extra growth and bolster tax revenues, all of which will help to reduce the country's huge deficit, says Brian Dennehy at Fund Expert. "We expect a long way to go on this because it is a huge problem they are tackling."

With prospects for the country finally looking brighter, you might be tempted to invest some of your cash in Japan. Ben Willis at Whitechurch Securities says funds run by a manager are the best route, as opposed to lower-cost index trackers. "Active managers are not hostages to fortune and can select the areas of the market that they believe offer the best opportunities," he says.

Mr Willis recommends the Jupiter Japan Income fund, managed by Simon Somerville, which invests in dividend-paying companies. He says it is worth seeking funds that offer to protect you from currency exposure, so you don't have to worry about the yen's movements.

But you might also be surprised to learn that a number of other managers who don't run Japan-specific funds have been investing in Japanese equities. Alastair Mundy, the manager of the Investec Cautious Managed fund, has found a lot of value in the market and has recently built up his holdings in Japanese shares to around 10 per cent, says Juliet Schooling Latter at Chelsea Financial Services.

"You're much better off in an actively managed fund," she says. "There are some great ones that can add a lot of value, whereas the index funds will always have a bias towards the large companies and not necessarily those in sectors that might benefit from, say, the weakening yen."

Remember that although this time could be different for Japan, it's a case of whether the investment is right for you. Philippa Gee, who runs her own wealth management firm, says: "I just feel that there are enough risks already in markets generally; that you do not need to increase that risk unnecessarily. For many, using a fund manager to control how much exposure you have to Japan might be best."

Ultimately, Miss Gee highlights that investing in Japan is a bet and that if you win, you could really benefit from the move – but you have to decide if it is a risk worth taking.

Emma Dunkley is a reporter at citywire.co.uk

Suggested Topics
PROMOTED VIDEO
Have you tried new the Independent Digital Edition apps?
News
ebooksNow available in paperback
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

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

iJobs Job Widget
iJobs General

Austen Lloyd: Commercial Property Lawyer - Cheshire

Excellent Salary: Austen Lloyd: CHESHIRE MARKET TOWN - An exciting and rare o...

Austen Lloyd: Residential Property Solicitor - Hampshire

Excellent Salary : Austen Lloyd: NORTH HAMPSHIRE - SENIOR POSITION - An exciti...

Recruitment Genius: Gas Installation Engineer

£29000 per annum: Recruitment Genius: A Gas Installation Engineer is required ...

Recruitment Genius: Domestic Gas Technical Surveyor

£28000 per annum: Recruitment Genius: A Domestic Gas Technical Surveyor is req...

Day In a Page

Homeless Veterans Christmas Appeal: Drifting and forgotten - turning lives around for ex-soldiers

Homeless Veterans Christmas Appeal: Turning lives around for ex-soldiers

Our partner charities help veterans on the brink – and get them back on their feet
Tove Jansson's Moominland: What was the inspiration for Finland's most famous family?

Escape to Moominland

What was the inspiration for Finland's most famous family?
Nightclubbing with Richard Young: The story behind his latest book of celebrity photographs

24-Hour party person

Photographer Richard Young has been snapping celebrities at play for 40 years. As his latest book is released, he reveals that it wasn’t all fun and games
Michelle Obama's school dinners: America’s children have a message for the First Lady

A taste for rebellion

US children have started an online protest against Michelle Obama’s drive for healthy school meals by posting photos of their lunches
Colouring books for adults: How the French are going crazy for Crayolas

Colouring books for adults

How the French are going crazy for Crayolas
Jack Thorne's play 'Hope': What would you do as a local politician faced with an impossible choice of cuts?

What would you do as a local politician faced with an impossible choice of cuts?

Playwright Jack Thorne's latest work 'Hope' poses the question to audiences
Ed Harcourt on Romeo Beckham and life as a court composer at Burberry

Call me Ed Mozart

Paloma Faith, Lana del Ray... Romeo Beckham. Ed Harcourt has proved that he can write for them all. But it took a personal crisis to turn him from indie star to writer-for-hire
10 best stocking fillers for foodies

Festive treats: 10 best stocking fillers for foodies

From boozy milk to wasabi, give the food-lover in your life some extra-special, unusual treats to wake up to on Christmas morning
'I have an age of attraction that starts as low as four': How do you deal with a paedophile who has never committed a crime?

'I am a paedophile'

Is our approach to sex offenders helping to create more victims?
How bad do you have to be to lose a Home Office contract?

How bad do you have to be to lose a Home Office contract?

Serco given Yarl’s Wood immigration contract despite ‘vast failings’
Green Party on the march in Bristol: From a lost deposit to victory

From a lost deposit to victory

Green Party on the march in Bristol
Putting the grot right into Santa's grotto

Winter blunderlands

Putting the grot into grotto
'It just came to us, why not do it naked?' London's first nude free runner captured in breathtaking images across capital

'It just came to us, why not do it naked?'

London's first nude free runner captured in breathtaking images across capital
In a world of Saudi bullying, right-wing Israeli ministers and the twilight of Obama, Iran is looking like a possible policeman of the Gulf

Iran is shifting from pariah to possible future policeman of the Gulf

Robert Fisk on our crisis with Iran
The young are the new poor: A third of young people pushed into poverty

The young are the new poor

Sharp increase in the number of under-25s living in poverty