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Time to focus on Japan?

Jonathan Wright

Jonathan Wright - Fidelity Personal Investing

Japan will be in focus this weekend as the Rugby World Cup comes to a climax in Yokohama. For investors, Japan has been out of focus for many years, so is now a good time to take a fresh look at the opportunities in the land of the rising sun?

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Unlike the Federal Reserve which cut rates this week, yesterday the Bank of Japan announced it would keep monetary policy on hold. In an attempt to boost the economy, interest rates in Japan are already in negative territory at minus 0.1%. However, in its announcement the central bank did hint it would be willing to cut rates further in an effort to get near to its target of 2% inflation.

Back in the 1980s Japan was the world’s second largest economy. Growth was at a fast pace and the country was on track to overtake the world’s largest economy, the US. Now, Japan is the world’s third largest economy, almost one-third of the size of China, struggling to grow and heavy in debt.

Much has been said about the country’s unfavourable demographics as it faces the challenge of a low birth rate combined with rising longevity rates. However, Japan is fighting back. Six years ago the Japanese central bank launched a huge stimulus programme, while Prime Minister Abe’s “three arrows” policy of monetary easing, fiscal stimulus and structural reforms are all focused on turning the stagnant economy around.

Looking on the positive side, the unemployment rate, which has risen slightly, is still near to its all-time low, consumption is 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 Tokyo Olympics in 2020 provide a welcome boost.

Against a backdrop of trade wars between the US and China, the Japanese economy, which is heavily exposed to global trade, has been more resilient in 2019 than might have been expected. Real GDP in the first half of the year was 2.3%, better than the long-term potential and stronger than forecast.

The rise in the consumption tax from 8% to 10% which took place at the beginning of October is key to understanding the likely path of Japan’s economy over the next year. It could lead to a slowdown in the fourth quarter but some commentators believe fears about its impact have been overdone. 

Five years ago, the hike from 5% to 8% caused a 7.3% reduction in GDP but that was because many people expected the second part of the increase, to 10%, to happen soon after. In the end the second hike was postponed multiple times and offsetting measures have been put in place to cushion the impact. Today the consensus estimate of the hit to economic activity is just 2.7%.

Factoring all of this in, an optimistic outlook is not reflected in the price of Japanese shares. For a long time Japanese shares have been out of favour and as a result valuations are approaching historical lows, especially when compared to the US where the S&P 500 has just hit an all-time high. 

As ever, stock picking will be key in such a market. Investing in a managed fund leaves the decisions to experts who search for opportunities in Japan, only choosing the 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. For those looking for a more contrarian approach the Man GLG Japan CoreAlpha Fund has recently been added to the list, along with the Lindsell Train Japanese Equity Fund which has more of a focus on companies with a high and sustainable return on capital.

Important information

The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Overseas investments will be affected by movements in currency exchange rates. Select 50 is not a personal recommendation to buy or sell a fund. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

Read more about Baillie Gifford Japanese Fund

View the factsheet to see price, charges, performance, details on how the investment's managed, and more.

Read more about Man GLG Japan CoreAlpha Fund

View the factsheet to see price, charges, performance, details on how the investment's managed, and more.

Read more about Lindsell Train Japanese Equity Fund

View the factsheet to see price, charges, performance, details on how the investment's managed, and more.

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