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Japan stock markets and funds quarterly review – a new era on the horizon?

We look at how the coronavirus crisis has impacted the Japanese economy, how Japanese funds have coped, and share our outlook for the future.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

It’s little surprise that investor sentiment towards Japan has fallen over the years. Although it remains the world’s third largest economy, lots of people are cautious of investing thanks to decades of sluggish economic growth. Though there have been positive developments along the way. Shinzo Abe’s 2012 election as Prime Minister boosted both investor and domestic confidence as he aimed to stimulate growth in the economy, increase Japan’s competitive position and recapture the market highs of 1989.

His progress was derailed this year however as the coronavirus crisis hit global economies and stock markets hard.

Japan reported their first coronavirus case in mid-January, and as of 24 September, Japan had recorded 79,768 cases – 71,981of those have successfully recovered.

Stability and certainty, particularly within government, is critical for Japan’s ability to handle the virus, develop future growth and ensure recovery. But things haven’t been easy recently. Abe’s resignation as Prime Minister has created political unrest as to who will take his place. It’s also raised doubts about the outlook for government policies on things like tax, government spending, interest rates and the supply of money in the economy – these fiscal and monetary policies are even more important during a crisis.

However, there’s some political resolution at least, as this month Yoshihide Suga has been announced as Abe’s successor. This should ease short term uncertainty and strengthen the future outlook.

Please note nothing in this article is personal advice. If you're not sure if an investment is right for you, please contact us about our advisory services. Investments will rise and fall in value, so you could get back less than you invest.

How has the economy fared?

The simple answer to this question is poorly. Japan entered the pandemic already in recession and coronavirus simply accelerated their struggles. Japan has recently reported a third successive quarter of decline, its worst economic performance since 1955.

Japan’s GDP (Gross Domestic Product) contracted by a record 28.1% in the second quarter of 2020, worse than the initial 27.8% figure the Cabinet Office predicted last month. A nationwide state of emergency and lockdowns in the country’s major export markets hammered consumer spending, production and exports.

Weak global demand for Japanese goods and services, along with the strengthening of the yen have put the economy and potential recovery in a complete state of disarray. Increasing commodity prices will likely push imports higher while exports struggle amid weak global demand and international restrictions. Exports also look less competitive due to the increasing value of the yen, which investors typically flock to as safe havens during a crisis. The yen has appreciated against the currencies of some of its largest exports markets, namely the euro and US dollar. This adds risk that global investors could dump their dollar or euro denominated assets in favour of the yen, increasing pressure on currency and furthering constraints for Japanese manufacturers.

Like all other countries worldwide, central banks and governments have had to intervene with unprecedented monetary and fiscal responses in order to quell the impact of the virus. The Bank of Japan (BoJ) has provided huge fiscal and monetary stimulus to cushion the fall in demand and to support growth as the country attempts to re-normalise.

The BoJ have boosted their monetary policy through unlimited purchases of Japanese government bonds (JGBs), increased purchases of exchange-traded funds (ETFs), Japanese real estate investment trusts (J-REITs), and corporate bonds. Furthermore, the BoJ increased its coronavirus lending programme to more than $1trillion but decided to keep interest rates as they are – currently at -0.1%.

Further measures might be needed, but for now it’s expected that the BoJ will hold off on any changes to monetary policy. This is until it can better assess how the current programmes are affecting the broader economy. So far the policies have helped prevent economic collapse but the outlook remains uncertain.

Is recovery on the horizon?

Analysts expect the rebound to be moderate and a recovery to take many years with the economy reaching pre-coronavirus levels around 2022.

Like every country currently, Japan have significant challenges ahead of them. One of the most important challenges is the decision to postpone the Olympic and Paralympic games to 2021. Japan have invested billions into this event making sure the country is prepared for the influx of visitors and the impact on local businesses. Postponing the games is expected to cost the International Olympic Committee (IOC) $800 million and run the cost for Japan further into the billions. Although this decision puts massive pressure on Japan, many see it as the correct thing to do.

IOC officials have rebranded the event to “the games that conquered COVID”. They’re committed to the games going ahead in July 2021 and it not being delayed a second time.

An increase in exports to China will help with demand for Japan’s exports and balance out the declines to Europe and other key markets. Japan and the UK have recently struck a free trade deal. Although the UK makes up for just 2% of exports and 1% of imports, it will look to increase trade between the two countries by an estimated £15 billion. Both positive to the outlook of Japan’s recovery cycle.

Japan’s ability to control the spread of the virus so far has been more effective than most western countries. Responsive targeting of clusters/vulnerable groups, the willingness of people to follow government instructions, and the strong social norms around hygiene and mask wearing have all made controlling the spread a lot easier. This coupled with an efficient health care system, huge government stimulus and bettering trade relations could help bolster recovery and welcome in the a new era.

The reign of Abe – a story of success or failure?

It’s hard to ignore what Shinzo Abe has done for Japan but lots feel like his story contains more chapters of failures than successes.

Prime Minister Abe gained power in December 2012 and introduced policies designed to kick start growth in the economy. ‘Abenomics’ focused on three arrows – boosting government spending, increasing money supply and revising reform strategies.

Deemed the most successful aspect of Abenomics was the large-scale monetary easing by the Bank of Japan – this involved low interest rates and huge asset purchases like government bonds. The magnitude of this response boosted stock prices and weakened the yen, helping Japanese companies dependent on exports to expand their profits. Generally a weaker domestic currency makes it cheaper for other countries to buy their goods meaning exporters benefit.

However, the success was short lived and in 2014 he introduced a rise in consumption tax which ultimately drove the economy into recession. Part of Abe’s strategy aimed to achieve a budget surplus and bring down debt over time. The reasons for hiking the tax were valid given the government spending deficit and need to pay for its ageing population. But this also meant that it cancelled out the existing stimulus he had put in place. The coronavirus has made this aim even more difficult.

Abe promised to achieve 2% inflation during his tenure and although his policies brought an end to deflation, Abe never attained the target he promised.

On 28 August 2020, Abe announced he would be stepping down as prime minister due to health reasons but would remain in his post until a successor was chosen. Initially Japanese equity markets fell, and both government bond yields and the currency rose against the euro and dollar. Short term investor sentiment fell but we think confidence should return with the appointment of Suga.

The dawn of Suganomics

Chief Cabinet Secretary Suga secured 377 of the 534 votes cast. His appointment is expected to mean a continuation of the Abenomics strategy. He’s firstly committed to confronting the virus, and then longer-term issues like Japan’s ageing population and low birth rate. He has also stated that there would be no consumption tax hike in the next decade.

Suga will also exert more pressure on telecom companies in order to reduce mobile phone bills and promote industry consolidation, especially among Small to Medium Enterprises (SMEs). Telecommunications have been one of the star performing sectors, but under Suga’s administration telecom operators could be looking at tough times ahead.

Implementing a digitisation strategy is high on his list and has been 14 years in the making. The reform aims to make use of digital technology including e-government, telecommuting, remote education and digitisation of medical payments at hospitals. The strategy faltered in the hands of subsequent administrations, including Shinzo Abe’s. With the future prospects of 5G and digital hospitals, this strategy could bolster Japan’s economic growth and aid their recovery going forward.

Lastly, Suga has made recent remarks hinting that he’ll continue Abe’s approach to foreign policy, centered on a Japan-US alliance and stable ties with China. It’s probably too early to comment on Suga’s plan but the next general election in Japan is to be held on 22 October 2021. Unless a snap election is called early we’ll learn more about Suga’s plan for Japan then.

How have Japan funds performed?

The IA Japan sector returned 1.6% over the last 12 months (to 31 August 2020), compared to the 0.7% return of the FTSE Japan index.

Larger companies outperformed their smaller and medium-sized peers, benefiting funds with a heavier weighting to large companies.

Sectors like oil and gas, utilities, industrials and financials all performed poorly. Conversely, health care and technology have been the star performers, as demand for both efficient medical care and internet-based services rose drastically.

Broadly speaking, funds with a focus on companies capable of above-average earnings growth, otherwise known as 'growth' companies, did best. On the other hand, 'value' focused funds, which often invest in companies undergoing a turnaround, haven't performed as well

Remember past performance isn’t a guide to the future. All investments fall as well as rise in value so you could get back less than you invest.

Over the past 12 months, Wealth Shortlist fund First State Japan Focus was the best performing fund in the sector. Sophia Li and team typically invest in growth focused larger companies that dominate the industry. Investing large amounts of the fund into companies within the healthcare and technology sector has also significantly bolstered the fund’s performance.

Aug 2015 - Aug 2016 Aug 2016 - Aug 2017 Aug 2017 - Aug 2018 Aug 2018 - Aug 2019 Aug 2019 - Aug 2020
First State Japan Focus n/a 27.7% 18.3% 3.0% 18.5%

Past performance isn't a guide to the future. Source: Lipper IM to 31/08/2020.

N/A – Full year performance is not available


Find out more about First State Japan Focus, including charges

First State Japan Focus Key Investor Information


Japanese markets are one of the most underweighted regions in the broader global equity context. Historically foreign investors have been net buyers of Japanese equites, but in recent years there have been significant outflows.

Based on expected continuity of fiscal and monetary policy after Suga’s appointment and Japan’s ability to control the spread of coronavirus, the outlook is more positive than other developed markets. This could mean that the market is undervalued currently, but there are no guarantees.

Research team activity

First State Japan Focus was added to the Wealth Shortlist in June of this year. We hold the Asian equities team at First State in high regard due to their track record, experience and stock picking skills.

Japan Focus fund manager Sophia Li runs the fund with a growth style bias, which has been a tailwind in the current market environment. Investors should be mindful that this style has been in favour for some time, and it’s prudent to hold a mix of styles within a portfolio to ensure diversification

How have the Wealth Shortlist funds performed?

We have three Japanese funds listed on our Wealth Shortlist and they have delivered mixed performances over the past 12 months.

First State Japan Focus was the best performing Japanese fund on the Wealth Shortlist over the past 12 months with a return of 18.5%*. Li looks for high quality companies that are dominant in their industry, hold a competitive advantage that others struggle to copy and takes into account environmental, social and governance (ESG) factors. We like how the fund reacts in volatile markets – the defensive nature of quality companies means the fund could hold up well in periods of poor market performance. Remember though, past performance is not a guide to future returns.

The fund invests across a diverse range of industries including food retailing, drugstores and medical equipment. Industries like these are essential, regardless of the state of the economy.

The weakest performing fund was Man GLG Japan CoreAlpha. Stephen Harker buys out of favour companies and patiently waits for them to potentially recover. When Harker and team feel the recovery is complete, or a better opportunity emerges, they'll sell and move on to the next investment. It's a style known as 'value' investing. This style of investing is currently out of favour and this style bias has contributed to the fund’s poor performance, lagging both the index and its sectors peers.

Although Harker’s contrarian investment style has been out of favour, he’s one of the most experienced fund managers investing in Japan. We think the fund has good growth potential over the long term but there are no guarantees.

The third Japanese fund on the Wealth Shortlist is iShares Japan Equity Index. This is a ‘passive’ index tracker fund, where the managers look to match the performance of the broader Japanese stock market, rather than try to beat it. The fund invests in just over 500 companies so it’s very well diversified and it keeps costs low.

Here’s how our Wealth Shortlist funds have done. For more details on each fund and its risks please see the links to their factsheets and key investor information below.

Aug 2015 - Aug 2016 Aug 2016 - Aug 2017 Aug 2017 - Aug 2018 Aug 2018 - Aug 2019 Aug 2019 - Aug 2020
First State Japan Focus n/a 27.7% 18.3% 3.0% 18.5%
iShares Japan Equity Index 19.1% 16.3% 8.7% -0.4% 1.1%
Man GLG Japan CoreAlpha 16.8% 21.5% 6.5% -6.9% -16.8%

Past performance isn't a guide to the future. Source: *Lipper IM to 31/08/2020.

n/a – full year performance data is not available.


Find out more about First State Japan Focus, including charges

First State Japan Focus Key Investor Information


Find out more about iShares Japan Equity Index, including charges

iShares Japan Equity Index Key Investor Information


Find out more about Man GLG Japan CoreAlpha, including charges

Man GLG Japan CoreAlpha Key Investor Information


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Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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