The sun is shining on Japan again
The Land of the Rising Sun seems to be emerging from decades of low growth and deflation. Japanese equities have seen a solid Q2, and experts believe in continued progress for Japanese companies.
Time to find your sunglasses for clouds are scattering, and the sun is coming out again. Japan, also known as the Land of the Rising Sun, is a central part of the East Asian region, but is also integrated into the Western economies. And now it seems that decades of weak growth and deflation are coming to an end. This provides opportunities for profitable equity investments that will also benefit the investors of Danske Invest.
Portfolio Manager Osamu Koide from Daiwa Investments advises Danske Invest on Japanese equities for the sub-fund Japan Class A, and Portfolio Manager Max Jul Pedersen from Danske Capital advises on global equities for Danske Invest’s global equity portfolios like the sub-fund Global Stockpicking Class A. They both take a positive view on Japanese equities, and Max Jul Pedersen has purchased more Japanese equities for Danske Invest in recent months. In their judgement, the following three reasons lie behind the prospects of a strong autumn for Japanese equities.
Reforms pave the way
The Japanese economy is generally performing better than it has for many years. The country has been plagued by deflation for years, but now the government has reversed this to a small inflation rate. At the same time, Prime Minister Shinzo Abe has announced a range of reforms intended to stimulate growth, including a corporation tax cut.
”Right now the Japanese economy is undergoing profound changes. We are watching developments closely now that deflation is ending. In the light of the economic improvement, we see that the share prices of many new companies rise in tandem with an increase in their return on equity,” says Osamu Koide from Daiwa Investments.
Companies are strengthening investor focus
Japanese companies do not have a tradition for being particularly shareholder-friendly. However, the new JPX-Nikkei 400 equity index was established last year and to be included in this index, companies will have to commit themselves to a more shareholder-friendly behaviour such as dividend payouts and more openness. This has led to stronger focus on investor relations.
”Unlike particularly US companies, managements in Japan are not exposed to pressure from shareholders for higher dividends etc. In short, many Japanese companies’ top priority is to secure their employees’ lifetime employment and subsequently the interests of the shareholders. This is problematic, but it also holds potential for improvement, which we are starting to see now,” Max Jul Pedersen says.
Currency and inflation driving factors
According to Max Jul Pedersen, interest in Japanese companies is also spurred by currency developments in Japan having improved competitiveness in the international market.
”Our interest in Japanese equities has increased. First of all, the yen depreciation has strengthened the Japanese companies’ competitive power globally, and if it is possible to create sustainable low inflation in Japan, it will also give domestically oriented companies far better conditions for generating business growth,” says Max Jul Pedersen.
