Japan enters a new era

Jonathan Wright

Jonathan Wright - Fidelity Personal Investing

At the end of this month, Japan’s current emperor Akihito will formally abdicate his position and hand the throne to his son, Crown Prince Naruhito. He will be the first Japanese emperor to do so in more than 200 years and the move will usher in a new imperial era, which will be known as “Reiwa”, meaning order and harmony.

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Announcing the name of the new era yesterday, Japan’s prime minister, Shinzo Abe, said it should encompass pride in the country’s history and traditions, along with hope for the future.

While the role of the Japanese monarchy is mostly ceremonial, Japanese workers, recognised for working long hours, will delight in the extended national holidays coming their way as the new emperor ascends the throne on 1 May.

Known as the Golden Week holiday period, each spring, from late April to early May, the country celebrates four national holidays over a seven-day period. Thanks to Japanese law, a normal weekday sandwiched between two national holidays becomes a holiday itself. So the creation of a one-time holiday this year to mark Prince Naruhito’s accession to the throne on 1 May, automatically creates two national holidays on 30 April and 2 May.

Combine these new days with the existing holidays and this year’s Golden Week has been dubbed ‘Platinum Week’ as it stretches uninterrupted for ten days from 27 April to 6 May. Bearing in mind the longest uninterrupted stretch you could expect in the UK is four days in a row (at Easter and when Christmas sits next to a weekend) ten days is quite a feat.

The fact that the Japanese stock market will be closed over this period hasn’t deterred investors. It’s a well-developed, export-led economy valued by the IMF at $5.1 trillion in 2018, giving investors plenty of opportunity to uncover companies with the potential to generate growth and income.

According to the latest Investment Association figures - the trade body for fund management companies that look after the bulk of retail investors’ money - Japan was the most popular region for investors’ money in January 2019, with net sales of £146 million, comfortably beating North America’s £134 million.

So what is the case for investing in Japan, as it enters the new Reiwa era?

Japan’s position as the world’s third largest economy behind the US in first place and China in second, means it’s been caught up in the ongoing crossfire between the two superpowers’ battle for economic dominance. This is important, as between them the US and China account for nearly half of all Japanese exports.

Much is also said about the country’s declining population and rightly so. Japan’s population is currently 126 million. However, if this is not radically addressed, the United Nations forecasts it will drop to 108 million in 2050, which is where it was in the early 1970s.1 With its aging population, this will impact the country’s productivity and shrink its domestic economy.

Looking on the positive side, unemployment is close to an all-time low, consumption is still strong and wages are rising. The Japanese domestic economy is also getting a significant boost from an explosion of inbound tourism, mainly from China and South Korea. The number of overseas tourists to Japan has grown in less than a decade from around 5 million to perhaps 40 million next year, as the Rugby World Cup this autumn and the Tokyo Olympics in 2020 provide a welcome boost.

These positives are not fully reflected in the price of Japanese shares. It has certainly been a frustrating market to invest in. For a long time Japanese shares have been out of favour and as a result the valuation of Japanese shares is approaching historical lows, especially when compared to the US where the S&P 500 has just enjoyed its best start to the year since 1998.

As ever, stock picking is key in such a market. Investing in a managed fund leaves the decisions to experts who search for opportunities in the country, only choosing those companies they believe have the potential to perform strongly. The Baillie Gifford Japanese Fund, which features on our Select 50 list of preferred funds, is well-placed to capitalise on Japan’s competitive advantages in sectors like automation and robotics. It’s also one of Tom Stevenson’s ISA picks for 2019.

Don’t forget the deadline for this year’s ISA is midnight on Friday 5 April 2019.

Source:
1United Nations World Population Prospects 2017

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