At the same time, the colossal Japanese Public Pension Fund confirmed it will more than double its allocation to equities from 12 to 25 per cent of its £750bn pot.
While investors in US and emerging market stocks pondered the implications of an end to the Fed’s QE programme, the Japanese indices took a huge boost on the news, rising 4.8 per cent in early trading and shooting to their highest levels since November 2007.
The country’s central bank said it would increase the monetary base – commercial bank reserves kept by the central bank – by Y80tn a year, up from its current expansion of Y60-70tn.
The move comes as the latest figures suggested the country is far off its 2 per cent inflation target. Inflation dipped to one per cent in September, sparking doubts that efforts to avoid deflation and kick start growth was on track.
Alex Treves, (pictured) head of Japanese equities at Fidelity, says the BoJ’s decision will continue to boost equity markets.
“The implications for both Japanese equities and the overall reflation theme are positive, but not without certain risks. Japan’s relatively low profile notwithstanding, the policy agenda is exciting,” he said.
“Considering the fundamental changes in corporate policy that are also occurring and the fact that Japan is among the few major markets to offer a valuation discount, the mid-term outlook for Japanese equities is attractive.”
According to Tony Lanning, the manager who runs JP Morgan’s Fusion fund of funds range, the timing of the decision was earlier than expected and, while not a huge increase, market sentiment has been buoyed by the Bank of Japan’s commitment to its target to boost inflation.
“The decision to act now, rather than December or early next year, was driven largely by the recent sharp decline in commodity prices and hence inflation expectations,” he said.
“Whilst the resultant bounce in the Topix overnight is pleasing, the investment case remains lies firmly in the corporate re-structuring story, which continues apace. Whilst most major equity markets can be considered fully valued, Japanese equities still offer significant upside, hence Fusion’s significant overweight to the region.”
He says should the policy be successful, the key sector to benefit will be financials leading him to buy the Polar Capital Japan and GLG Japan Core Alpha for core exposure to the region due to their heavy overweight to the sector. The two funds have 22.47 and 13.2 per cent of their portfolios in Japanese banks.
The two funds have returned 20.12 and 10.45 per cent respectively over the past three years compared to an IMA Japan sector average of 22.25 per cent and a gain in the Topix of 23.7 per cent.
Performance of funds, sector and index over 3yrs
Source: FE Analytics
Square Mile Research rates the GLG Japan Core Alpha fund with its highest ‘AAA’ rating, saying its track record and manager – FE Alpha Manager Stephen Harker – are “excellent”.
“We consider the fund to be a sound option for those investors seeking returns from Japan. Note that it can take time for the market to correct the valuation anomalies that the team identify. This coupled with the low turnover approach may mean that holders require patience,” Square Mile said.
“The managers previously applied the process to smaller companies for many years and demonstrated that the approach worked successfully across various market cycles. Since 2006, the strategy has been applied to larger stocks and it has enjoyed similar success.”
Square Mile rates only one other Japan fund – Schroder Tokyo – as ‘AAA’. The £1.4bn fund has been managed by Andrew Rose since 2004 over which time it has returned 55.61 per cent compared to a sector average of 30.68 per cent and a gain in the Topix of 44.34 per cent.
Performance of fund, sector and index since April 2004
Source: FE Analytics
Square Mile says the fund makes a good core fund for exposure to Japanese equities, owing to the strengths of the manager and supporting team.
“With Andrew Rose having been at the helm for over 10 years this fund benefits from one of the most experienced Japanese equity managers in the industry. He is ably assisted by a well-resourced team of dedicated analysts, many of whom he recruited during his time as head of Japanese equity research [at Schroders, when he was based in Tokyo],” Square Mile said.
“It intends for stock research to be the primary driver of returns but within this there is some thought given to the bigger picture. Overall, the portfolio is well diversified and given the approach it exhibits a slight bias to value factors. Nevertheless, it has remained a competitive proposition across a range of market conditions and we would view this fund as a very solid and wholly viable option for exposure to the asset class.”