This follows Japanese prime minister Shinzo Abe’s announcement on Tuesday that the plummeting oil prices are boosting corporate revenues and household’s disposable income.
While the Japanese economy appears to be strengthening, the current situation is a far cry from just a handful of years ago. In 2012, for example, the Japanese public debt exceeded a staggering ¥1 quadrillion, which was 235 per cent of the country’s GDP.
In a desperate attempt to reverse the effects of tax revenues collapsing, natural disasters and the rise in spending, the ambitious ‘Abenomics’ stimulus programme was deployed to remedy decades of economic stagnation.
Of course, the country has launched ‘ambitious stimulus programmes’ before and they have failed to bolster the economy. However, Neptune head of research Chris Taylor (pictured) believes that, this time, Japan really is making a comeback.
Japanese index over 10 years vs global index
Source: FE Analytics
He said: “The worst words a fund manager can ever utter are ‘this time it’s different’, so I’ve already had a gravestone carved, but nonetheless I really think it’s true.”
FE Alpha Manager Taylor, who runs the Neptune Japan Opportunities fund, drew attention to fundamental structural changes that he believes are will drive company earnings growth.
Firstly, a long-term shift from export-only to global multinational production has given the Japanese market a drastic overhaul.
“This has actually been going on since the early 90s,” he explained. “What you’re really buying in Japan is a bunch of companies that are very good at what they do in their sector on a global basis, that are the most global multi-nationals you will find, far more so than their US and European rivals.”
“Japan has got old-fashioned fundamentals. There is growth in units because they’re largely focused on the emerging markets, which is a cheaper place to do business, so they’re improving their margins through volume and company cost.”
“This is what you get for free. This is the icing, the cream and the cherry on top of what is a very nice cake already.”
Taylor also believes that dramatic policy shifts based on the most recent electoral outcomes have caused a system reset, forming a far stronger ‘Japan version 2.0’.
He said: “Don’t kid yourself that this is a new Japan, this is old Japan coming back. We’ve finally got past 30 years’ worth of political turmoil.”
The December 2012 election result seemed to put an end to Japan’s phenomenal prime minister turnover, which amounted to 17 different leaders over a 25-year period.
Abe is the first prime minister within this time to have an internal Liberal Democratic Party (LDP) majority, which has no external opposition.
“A total clean sweep in both houses of parliament,” Taylor said. “The biggest opposition party has 58 seats, compared to LDP’s 315 seats. I bet Cameron wishes he was in a similar situation, whether it’s the SNP, Labour or UKIP.”
“He [Abe] took advantage of the weakness in the opposition to get himself locked in for another four years. He’s still got the seat majority and what it means is you just get more of the same. More QE, more government spending, trash the yen.”
Taylor emphasised that Japan’s huge QE operation, which is ten times the relative size of the US QE programme, is absolutely necessary in boosting the economy.
“You know the old adage, ‘anything you can do, I can do better’? Well, the Japanese can do a hell of a lot better. Draghi and co are dragging their heels but the Japanese have said ‘stuff that, we’ll do ¥80trn a year and we’ll see how that goes’.”
“At one stage, during the middle of last year and the year before, Japanese banks were actually buying more US treasuries than the Federal Reserve was through QE. So they’re out-QE-ing everybody, they don’t care. It’s an order of magnitude bigger than anything the Americans have done already, and they’re not taking their foot off the gas.”
Despite the fact that such a large-scale money printing experiment could cause long-term worries in some, Taylor believes the Japanese economy is in safe hands.
He said: “All we’ve got now is a government that understands that it has to put in big policies quickly and it has the political power to do it. Because the option of doing nothing is not there, that will guarantee the country goes bust. These guys are enacting preliminarily in the weakening of the yen, as it’s the only way they can generate sufficient tax revenues to firstly eliminate the deficit and eventually, through higher equity and higher property prices, pay the national debt.”
“That’s exactly what they did with the bull markets of the 80s having run up national debt in the 70s. They’ve got a 30-year period of mismanagement to make up for. The annual budget deficit is 12 to 15 per cent of GDP. The only way they can fill that gap is with corporate profits.”
Taylor believes that this heavy dependence on multinational companies is making many investors bearish on Japan. However, he says that a global spread of Japanese companies is what makes the economy so resilient.
“For example, look at when the earthquake hit at the end of March 2011 – that would have finished anybody else. Toyota thought it would take them until the end of the year, nine months later, to get their domestic car volume production back to where it was before the earthquake, remember this is 31 March 31. They did it by 24 June,” he said.
“Why could they do it? Because they had the money to rebuild the factory and they’ve got factories overseas so they can ship products in. Because of the global spread, they don’t care about financial crises, they don’t really care about earthquakes. It looks like the only thing left for them to have a bash at is if somebody invades from Mars, and even then they’ll deal with that. It’s all because companies started investing abroad massively.”
Despite his faith in Abe’s economic tactics, Taylor admits there are still problems that need to be dealt with.
“Taxes have collapsed,” he admitted. “Taxes are now back where they were in 1987. How many countries could exist on that? You don’t read about this in the press or from stock brokers.”
“When you look at the major springs of tax here, you can see that income tax has nearly halved, because the average wage in Japan has gone from ¥6m to ¥4m yen and at ¥4m you don’t pay taxes. It means, in practice, 85 per cent of Japanese in employment pay no tax.”
Taylor also took Japan’s aging population into account, as 25 per cent of the Japanese population is over 65. This is another contributing factor to the tax collapse and the increase in spending.
However, Taylor believes that Japan is the best-equipped country to avert any crisis.
He said: “It’s a cheap market, it’s got good fundamentals, but people don’t understand it so they don’t trust it – which is why it’s cheap. You’ve got the turbo-charge of the politics and the yen, and money is being switched out of bonds in Japan.”
“To be blunt, if you want the job done properly, whether it’s better or worse, let the Japanese do it, their dedication to it is fantastic.”
Taylor was named Japanese equity manager of the year at the recent FE Alpha Manager of the Year awards. His five FE Crown-rated Neptune Japan Opportunities fund is the highest returning portfolio of its peer group since the manager took over, following its 209.68 per cent gain.
Fund vs benchmark and sector since 1st May 2005
Source: FE Analytics