Japan looks to a new leader

Abe’s election platform included big increases in government spending on public works and more expansionary monetary policy. The latter includes the Bank of Japan (BoJ) buying foreign currencies and bonds to weaken the yen and increasing the BoJ’s inflation target to 2% from 1%. The theory is that domestic consumers will spend in the near term to avoid higher prices in the future.

“If Abe does the public spending he is trying to achieve and weakens the yen, and meets his 2% inflation goal, then we could see a good rebound in the Japanese economy,” says Eileen Dibb, portfolio manager with Pyramis Global Advisors LLC, a Fidelity Investments company, based in Smithfield, R.I., and co-manager of Fidelity AsiaStar Fund.

That’s easier said than done. Previous Japanese governments have promised to get domestic demand moving, but it has remained relatively flat for two decades.

Some portfolio managers think a different approach is needed. Keisuke Tsumoto, head of fixed-income investments in Tokyo with Toronto-based Manulife Asset Management Ltd., believes Abe’s government should be looking at the bigger picture – such as how the economy can benefit from membership in the Trans-Pacific Partnership Agreement.

With Japan’s long-standing dependence on exports, particularly autos and consumer electronics, Tsumoto says, some kind of involvement in this kind of a trade pact would be “very positive” for the country.

@page_break@Banks and energy

Many portfolio managers are extremely soft on the consumer electronics sector and lukewarm on the major automakers.

Erwin Hidalgo, portfolio manager in Hong Kong of IG Investors Japan Growth Fund, sponsored by Winnipeg-based Investors Group Inc., likes Japanese banks. They are well capitalized, he says, and in a strong position globally: “With the financial crisis in Europe, Japanese banks are finding borrowers, so they are growing their portfolios outside of Japan and lending in Asia. It is a very good source of growth because [the region] has been abandoned by the European banks because they have no money to lend.”

Hidalgo particularly likes Sumitomo Mitsui Financial Group. Inc. and Mitsubishi UFJ Financial Group Inc., two of the stronger megabanks in Japan.

Another sector of interest is energy. Spencer Mellish, senior portfolio manager with Highstreet Asset Management Inc. and portfolio manager of AGF EAFE Equity Fund, says that deciding on Japan’s energy future is going to be a challenge for policy-makers.

Automated machinery

Two nuclear reactors have been restarted since the massive earthquake in 2010, but there’s growing interest in other sources of energy. That makes IMPEX Corp., one of Japan’s largest oil exploration companies, particularly attractive says Charles Edwardes-Ker, vice president and director with TD Asset Management Inc. in Toronto, especially given the new gas exploration in Australia.

Both Hidalgo and Dibb believe SoftBank Corp., a telecommunications firm, is a company to watch. It built out its cellphone network for 4G LTE in Japan to enable the firm to offer the iPhone 5, for which it is the Japanese distributor. The company also is acquiring a majority stake in Sprint Nextel Corp.

Japan also has strength in automated machinery and robotics. Both Edwardes-Ker and Mark Grammer, senior vice president, investments, with Toronto-based Mackenzie Financial Corp. and manager of Mackenzie Focus Japan Class Fund, believes this industry has a strong outlook for 2013 and beyond, particularly with China’s increasing need to automate its factories. In particular, they both like FANUC Corp., a robotics company.

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