Last year was a good one for Japanese stocks, even though economic growth was less than 1%. But the key to sustained long-term gains in Japan is further progress in the government’s push toward corporate reform.
“It’s been one of the best, if not the best performing market of the major markets anywhere in the world,” says Mark Grammer, senior vice president, investment management, at Toronto-based Mackenzie Financial Corp. and portfolio manager of Mackenzie Global Growth Class Fund.
Japan’s corporate sector has benefited strongly from Prime Minister Shinzo Abe’s three-part economic reform program, dubbed “Abenomics,” which was put in place shortly after Abe was elected in December 2012. An element of that program is aggressive quantitative easing (QE), which has pushed down the value of the yen vs the U.S. dollar (US$) by almost 50%, making Japan’s exports more competitive and profitable.
Abe also is encouraging corporations to be more responsive to shareholders – a significant shift for the country’s corporate sector, in which there is a heavy amount of cross-ownership of company shares.
“One company will hold a large amount of shares in another company, so there perhaps is less impetus for the board to act against the company because one company’s management may sit on the board of another,” says Greg Gipson, vice president, head of portfolio management, quantamental investments, with Toronto-based BMO Asset Management Inc. and portfolio manager of BMO Global Equity Class Fund.
Abe wants companies to establish more open boards of directors that include an increased number of women and independent directors, as well as focus on increasing return on equity. These improvements are starting to occur slowly, says Stephen Lingard, senior vice president of Franklin Templeton Solutions, a division of Franklin Templeton Investments Corp. in Toronto and manager of Franklin Quotential Diversified Equity Portfolio.
In December, the Bank of Japan (BoJ) announced a new asset-buying program to reward companies with positive corporate governance. The BoJ will buy 300 billion yen per year in exchange-traded funds that track companies that can show they are making investments in physical and human capital.
Lingard notes that this policy is not an increase in QE, as the BoJ will finance this initiative with sales of 300 billion yen in previously bought assets. Essentially, the government is trying to direct its capital to the firms that are meeting the goals of Abenomics, which include higher wages for Japanese workers.
“If you have more profitability to draw from, you could pay higher wages,” says Eileen Dibb, portfolio manager with Fidelity Investments Asset Management in Smithfield, R.I., and portfolio manager of Fidelity Japan Fund. Improving income levels is important, she says, because one of the aims of Abe’s policies is creating an average 2% annual increase in consumer prices.
Although the year-over-year increase in Japan’s consumer price index was only 0.3% in November, it was pulled downward by the big drop in energy prices. Lingard notes that the core inflation rate, which excludes energy and fresh food, actually was 1.2% in December, a “heroic number” for Japan’s economy.
Consumer spending was down by 0.8% in 2015 on the back of a 2014 increase in the sales tax. But, Lingard says, it could rise 1.2% in 2016. He expects growth in real gross domestic product to be 1% or higher in 2016 and that consumer spending and private investment could play key roles.
Abe also has proposed a new spending package for 2016.
“I think the government feels [it is] in a position to stimulate the economy the good, old-fashioned way,” Lingard says, “and that is through fiscal stimulus, infrastructure spending and getting money into the hands of low-income earners and pensioners who have been hit by rising prices.”
One sector that already is benefiting from Abenomics is real estate. Dibb says there are “signs of life” in related lending and an increase in condominium sales in Tokyo.
The Fidelity fund’s holdings as of Sept. 30, 2015, include Mitsui Fudosan Co. Ltd., a major real estate developer with good fundamentals.
Another holding is Astellas Pharma Inc. Japan’s aging population makes this company, which produces medication, attractive. Dibb notes that Astellas has developed a treatment for cancer.
Gipson likes Nichiha Corp., which manufactures exterior walls and fibre-reinforced siding for homes. He notes that the company’s U.S. sales are up by 53% from a year earlier, having benefited from the popularity of home renovations in that country.
The BMO fund also holds Nippon Telegraph and Telephone Corp. “It is a Japanese [telecommunications] company, but it has strong and continued expansion throughout Asia,” says Gipson. “[Nippon T&T has] a tremendous amount of cash on [its] books and [is] very shareholder-friendly through both buybacks and dividends.”
Grammer points to Temp Holdings Co. Ltd, a staffing services company, as one of the best-performing stocks in Japan in 2015. “Given the very tight labour market that Japan has right now,” he says, “a company that does placement offers a very valuable service, and so we will continue to hold that one.”
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