Japanese Equities - time to get on board?

One of the top performing equity markets this year has been Japan, since Shinzoe Abe returned to being the Prime Minster last November his determination to get the economy back on track has spurred investment back into Japanese equities.  The Yen has devalued to levels not seen since 2009 and as such this heavily exporting nation is beginning to show signs of improvement.

To further strengthen Abe's campaign the new governor of the Bank of Japan, Haruhiko Kuroda shares his doveish (favouring low interest rates) views and he has spoken out about the state of the economy.  With debt to GDP at 230%, the highest of any developed nation there is a significant amount that needs to be done to get the economy back on track.  Monetary easing of around £72bn earlier this year saw the first steps in the right direction, markets now expect utter commitment from the current administration as previous false dawns have occurred.  This first round of QE will be one of many steps that need to be taken in order to successfully navigate out of years of depression and meet the 2% inflation target set.  Any diversion from this plan will see investors running to hills yet again and markets will almost certainly crash to the floor.  

Furthermore the currency currently at 94 Yen/USD is at a suitable level for exporters to gain a competitive advantage and spur demand for Japanese cars and technology.  An inflation target of 2% is extremely important, currently in Japan it is cheaper keeping your money underneath the mattress instead of having it in a bank account.  As such a majority of Japanese bonds are held domestically as this saving nation has no incentive to invest their money.  Inflationary pressure will spur both foreign and domestic investment back into companies and drive the economy forward.  Demographics play a big part in the picture here as Japan has one of the oldest nations.  Healthy lifestyles and improving medicine means the percentage of the working population in Japan is ever decreasing.  There are certainly many obstacles left to overcome, however for investors not invested in this economy, you may be left behind if your not careful.  Kuroda said recently, "We need to follow through on what we say and deliver bold monetary easing so as not to betray market expectations,"  This instils some confidence in me that there is significant commitment this time and indicates this could be the best performing market this year.

Many are still fairly sceptical  however from a bottom up view, there are many Japanese companies that have been restructuring over the past few years.  The strong currency over the past few years has meant a number of mergers and acquisitions have taken place strengthening the core structure and diversification of earnings.  From a valuation basis, these companies are historically fairly cheap and present significant upside potential.

Legg Mason's Japanese equity fund is probably the best performing fund this year returning 44%! I challenge you to find better.  This fund targets smaller companies and once this market and economy gathers pace, this sector will almost certainly out perform.  If you are verging on the more cautious side I would be investing in the more defensive funds such as Aberdeen Japan Growth, a high conviction portfolio with excellent long term track record.

For those of you who are not invested in Japan, you many want to reconsider, this market may be about to take off.