We see opportunities arising in Japan. The country’s outlook is likely to be supported by economic policy, high productivity, rising wages, structural reforms, attractive stock prices and rising dividends. It’s worth digging into some of these points in more detail.
Prime Minister Shinzo Abe has implemented his programme designed to lift Japan out of stagnant or falling prices, while also stimulating growth as well as reforming corporate culture and governance. The government has extended public spending while the Bank of Japan has continued to lower interest rates into negative territory, while also pumping new cash into the financial system. The effect on inflation has been slower than Mr. Abe would have liked, but it is showing signs of a pick-up.
Another source of inflationary pressure comes from rising wages. Despite a successful campaign to encourage more women into the workplace, there remains a labour shortage. As a result, salaries have been rising with 70% of Companies saying in March that they would lift base salaries1.
Japan also has high productivity. In other words, each worker or machine produces a relatively high level of output compared to their equivalents in other countries. One of the likely benefits of this is that rising salaries shouldn’t increase the costs of companies disproportionately.
What’s more, Japanese companies have built up considerable cash reserves. As well as helping to cover rising salaries, this money can be used to increase dividend payments to shareholders. This is something of a cultural shift in Japan and is being encouraged as part of the government-implemented reform.
Despite all of this, the perception of Japan as a periphery investment has helped to keep share prices there relatively low compared to their US and eurozone counterparts. As a result, we are looking at the region carefully with a view to identifying appropriate opportunities.
1 Source: “Corporate Japan warms to pay raises this spring”, Nikkei Asian Review, 15 March 2018.
Forecasts of future performance are not a reliable guide to actual results in the future, neither is past performance a reliable guide to future performance. The value of investments, and the income from them, may fall as well as rise and cannot be guaranteed. Any views expressed are our in-house views at January 2019. Investment markets and conditions can change rapidly and the views expressed should not be taken as statements of fact nor relied upon when making investment decisions. This information may not be used, copied, quoted, circulated or otherwise disclosed (in whole or in part) without our prior written consent.
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