Multi-Manager

Destination Japan – fat but fit, just like the Sumo wrestler?

The market has significantly under-performed this year, but sterling investors have been bailed out by the currency
July 2018

Robert Burdett

Joint Head of Multi-Manager

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Risk Disclaimer

For professional investors only. Views and opinions expressed by individual authors do not necessarily represent those of BMO Global Asset Management. The information, opinions estimates or forecasts contained in this document were obtained from sources reasonably believed to be reliable and are subject to change at any time.

A recent trip to Japan reinforced conviction in the overweight Japanese equities stance taken across our portfolios. It also allowed me to achieve my ambition of watching a Grand Sumo Tournament in the flesh.

Given that Grand Sumo Tournaments only take place around two to three times a year we were lucky to catch one the night before we flew back home. Sitting ringside (not too close!) I reflected on my trip as the remarkably flexible 200kg adversaries ceremoniously threw cleansing salt in the air before crashing together with huge power and much technique.

 

Appearances can be deceptive

Rather like the Sumo wrestler the image of Japan Inc. is of out-of-shape corporations as a result of a jobs for life culture, inefficient balance sheets, few independent non-executive directors and a lack of shareholder focus. But like the Sumo, appearances can be deceptive. Tokyo remains hugely vibrant and through the many fund manager meetings, visits to Japanese corporations, and the conference talks from central bankers, politicians and strategists we were fortunate to listen to, we could see through this to continued change for the better largely steered by the reign of Prime Minister Abe and his self-defined Abenomics.

The market has significantly under-performed this year, but sterling investors have been bailed out by the currency – unless they were hedged. Japan has perhaps unsurprisingly recently seen a fall in investors’ confidence as they start to challenge the success of Abe and his reform programs. With this in mind it seemed a sensible time to visit the island to try and get a better understanding of both the challenges and opportunities our managers face.

It’s true that the momentum of Abenomics probably peaked a while ago but the assistance of the Bank of Japan may have further to go. With recent confirmation of their latest policy tweaks, we can confirm that Tokyo based market participants were more accurate in their expectations, whereas the international community expected more. The market was up 2.7% on the day of the announcement nonetheless which is interesting.

 
Becoming easier to navigate

Japan has not always been easily accessible. On previous trips it was difficult to navigate the sprawling metropolis of Tokyo. Road, trains and subways signs were only in Japanese. Even signs at the airport were less international. It is perhaps not surprising that Tokyo was way down the inbound visitor rankings. Abe and his government have made a huge effort in attracting inbound tourism (part of Abe’s ‘third arrow’). Evidence seems to suggest it is working. According to the World Bank, Japan saw approx. 13m inbound visitors in 2014, and 20m in 2015. The government has recently updated its target to 40m in 2020 and 60m for 2030. This may sound ambitious but we in the UK received 33m inbound tourists by comparison for a smaller country with half the population, and we noticed special discounts for tourists and help to transport items to the airport.

 
Gaining a local perspective

This trip was an invaluable and well-timed insight to a changing economy, the rate of change and perception of that change across markets and industries. It also provided an opportunity to gain a deeper knowledge into a number of our key Japanese holdings.

Rather like the impressive Sumo wrestlers we saw, we think it is possible to be fat (sub-optimal economic and corporate efficiency) but fit (corporate good health and high savings) and although the fat is not coming off at the pace we would ideally like, the many world class companies of Japan are cheap and the world is underweight, unlike us. Time will tell how the fourth year of Abenomics unfolds but we will be back next year for a further look.

Risk Disclaimer

For professional investors only. Views and opinions expressed by individual authors do not necessarily represent those of BMO Global Asset Management. The information, opinions estimates or forecasts contained in this document were obtained from sources reasonably believed to be reliable and are subject to change at any time.