Japan’s economy expands as Abenomics boosts investment case

10th June 2013

Japanese growth has been revised up further boosting investor hopes for a sustained recovery in the world’s third largest economy writes Philip Scott.

The economy expanded by 1% in the first three months of the year, up from previous forecasts of 0.9%, representing an annualised growth rate of some 4.1%.

Japan has experienced a volatile period recently. In mid-May on the back of a weakening yen, Japan’s Nikkei index surged over the 15,000 mark, for the first time since 2008. However by the end of the month it was nursing its wounds after plunging by a more than 7% in a single session, marking its worst daily fall in some 13 years. Over the past 30 days it is down by 7%.

Japan has introduced a spate of policies, such as upping its inflation target, to 2%, in a bid to kick-start its economy which has been battling deflation for some 20 years. Japan’s new prime-minister Shinzo Abe, took up his role at the end of last year. Since then he has encouraged loose monetary policy, dubbed ‘Abenomics’ where he has pledged to pump billions of yen into the economy.

Julian Jessop, chief global economist at Capital Economics, says: “The economic data have started the week on a brighter note. Admittedly, the upward revision to first quarter GDP is largely old news and the detail is less positive. However, the May readings on consumer confidence and the Economy Watchers Survey (EWS) suggest that the recovery still has some decent momentum and that it may not be too long before the labour market data start to improve too. The EWS is the most encouraging, as it was taken during the period of greatest turmoil in the equity markets.”

Despite the recent volatility, generally speaking markets have reacted well, with the Nikkei up by 42% over the past six months, and by 60% over 12. A weaker yen against the US dollar has helped push-up the revenue potential for exporters, given it makes them more attractive to overseas buyers. On the other hand it ups the price of Japan’s imports.

Speaking to trade website Fundweb, Charles Stanley Direct, head of investment research Ben Yearsley points out that he believes there is more to come: “It is coming from a cheap very low base and I am holding on, as I believe there is a lot more to come. The key for Japan at the moment is hitting the 2 per cent inflation target, within two years which the prime minister has made a key goal.” Among Yearsley’s recommendations for investors eyeing Japan are the Jupiter Japan Income and GLG Japan CoreAlpha Prof funds.

Mark Dampier, head of research at fund broker, Hargreaves Lansdown says: “Aggressive stimulus measures designed to tackle Japan’s long-running deflationary problems, including a doubling of its Quantitative Easing programme to 7 trillion yen (£46bn) each month, have been well received by investors. The stock market has rallied strongly, particularly economically sensitive areas.”

Dampier recommends, among others the Jo Hambro Japan and Schroder Tokyo funds. He also likes Invesco Perpetual Japan Fund, which he says is heavily exposed economically sensitive areas. He says: “This has helped spark a turnaround in the fund’s fortunes over the last six months, after a period of underperformance between the middle of 2010 and mid-2012. The fund’s recent performance has been driven by a healthy weighting to financials such as banks, brokers and real estate, which have benefitted from increased investor risk appetite.”

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