Tuesday, December 22, 2015 - 10:01

Mount Fuji

Markets still seem in thrall to Prime Minister Shinzō Abe and his ‘Three Arrows’ reform programme, dubbed ‘Abenomics’, even if his reforms have yet to generate tangible progress toward his and the Bank of Japan’s short-term targets for inflation and economic growth.

At least the Japanese market does have valuation in its favour while the creation of the new Nikkei JPX-400 index adds welcome colour, as corporations look to engage more fully with shareholders, allocate capital more rigorously and improve returns.

This element to the Japanese story, coupled with the Bank of Japan’s (BoJ) determination to press ahead with its Quantitative Easing (QE) programme, may help to support share prices, if not the local economy and the yen.


Prime Minister Abe dominates Japanese politics and his failed first stab at the top spot in 2006-07 seems a distant memory. He swept to power in December 2012 and immediately announced his ‘Three Arrows’ programme, which targeted:

  • Huge fiscal stimulus and infrastructure spending programmes
  • Huge monetary stimulus, initiated with the relaunch of QE by the Bank of Japan five months later
  • Structural reform across areas such as employment law, agriculture, tax, energy and foreign direct investment

Voters have since responded favourably to ‘Abenomics’. The Prime Minister recorded a crushing win in December 2014's snap general election, which left the Government with an unchanged tally of 326 seats out of 475.

The electorate will get a further say in 2016, when half of the 242 seats in the Diet's upper chamber, the House of Councillors, are contested.


Despite progress with many of its planned reforms, Abenomics is yet to fully deliver on either its inflation or growth goals.

This is at least partly because Japan is still saddled with huge sovereign debts, which come to some 250% of GDP, a figure which dwarfs even liability-stricken Greece.

A planned increase in consumption tax from 8% to 10% in 2017 complicates matters. The extra income is needed to fund the debt but it could have a negative impact on consumer spending.

This explains why Abe is pushing ahead with a plan to cut the corporate tax rate in 2016 from 34.6% to 31.3%, to encourage firms to spend and invest more.

Inflation is sinking again in Japan

Inflation is sinking again in Japan

Source: Thomson Reuters Datastream

Economic growth remains patchy, despite the potential benefits of a weaker yen. Only a dramatic upward revision to the initial estimate for Q3 GDP helped Japan dodge its fourth technical recession in five years.

Japan’s GDP growth profile remains patchy

Japan’s GDP growth profile remains patchy

Source: Thomson Reuters Datastream, Bank of Japan

The International Monetary Fund (IMF) is unsurprisingly unconvinced that Japan is out of the woods, judging by its October World Economic Outlook. The IMF forecasts GDP growth of just 1.0% for 2016, after a modest 0.6% advance in 2015.

Corporations have yet to really get the feel-good factor either. The latest Tankan, or business sentiment survey, came in unchanged at +12 in December, although this did at least represent the tenth consecutive positive score. Progress is clearly proving hard-won and this may be why Abe is already talking about a second phase of Abenomics, which also has three parts:

Nikkei 225 index does seem to correlate with the Tankan Business Sentiment Survey

Nikkei 225 index does seem to correlate with the Tankan Business Sentiment Survey

Source: Thomson Reuters Datastream, Bank of Japan

  • A strong economy and a 22% jump in total GDP from ¥491 trillion to ¥600 trillion
  • Support for families and increasing the birth-rate so the population still exceeds 100 million by 2065
  • Provide social security, so no-one has to stop working so they can care for aged relatives

The details remain vague, especially the timeframe for the economic growth plan, so investors need to keep an eye out for the release of further details.


Even if is still hard to conclusively argue that Abenomics is working in the real world, its power in the financial one is hard to deny for two reasons.

  • First, the yen has gone through the floor.
  • Second, the stock market has boomed. The Nikkei 225 and Topix indices have soared, even if the yen's slide has reduced returns in sterling terms to UK-based investors.

Abenomics has driven the yen lower and the stock market higher

Abenomics has driven the yen lower and the stock market higher

Source: Thomson Reuters Datastream

Abe’s Government has even tried to lure local private investors into the market with November’s very successful (and cut-price) flotation of Japan Post, which was sliced up into three separate entities covering postal, insurance and banking services.

Foreign investors are also looking a lot more closely for two reasons:

  • One, Japan potentially offers value at a time when it is hard to find elsewhere. Tim Price of PFP Group helpfully points out in his weekly blog that roughly 70% of the US market trades on a price / book ratio above two times. Roughly 40% of the Japanese stock market trades on multiples of less than one times book value.
  • Two, the creation of the JPX-Nikkei 400 index in 2014 is designed to encourage better corporate governance and improved company performance. The benchmark’s constituents are hand-picked and one test for selection is their policy toward shareholder-friendly dividends and share buybacks.

Japan has outperformed its global peers since the launch of Abenomics, although the yen’s fall has muted the end results. The chart below shows the Nikkei 225 (in sterling terms) divided by the FTSE All-World benchmark (also in pounds). If the line rises, Japan is outperforming and if it falls it is underperforming.

Japan has outperformed since Abe took power in late 2012

Japan has outperformed since Abe took power in late 2012

Source: Thomson Reuters Datastream

QE to infinity and beyond from the Bank of Japan could keep the pot boiling, especially as Japanese corporates are rising to the shareholder value challenge, although at some stage Abenomics will need to start delivering, not least to shelter the yen from further damage.

How to Access Japanese Markets

According to Morningstar, there are nearly 50 OEICs, including a couple of tracker funds and the top performers in the Large Cap arena on a five-year view are listed in the table below.

Best performing Japan Large Cap OEICs over the last five years

OEIC ISIN Fund size
£ million
Annualised five- year performance Twelve-monthYield Ongoing charge Morningstar rating
CF Ruffer Japanese C (Acc) GB00B846SB60 467.6 13.3% 0.0% 1.23% *****
CF Morant Wright Nippon Yield B (Acc) GB00B42MKS95 278.6 12.8% 2.3% 1.19% *****
AXA Framlington Japan Z GBP (Acc) GB00B7FSWP64 53.8 12.8% 0.0% 0.88% *****
Old Mutual Japanese Equity R (Acc) GB00B1XG9F96 23.9 9.9% 0.5% 1.00% ****
M&G Japan I (Acc) GB00B74CQP79 261.2 9.6% 0.8% 0.96% ****

Source: Morningstar, for Japan Large Cap category. Accumulation units only.
Where more than one class of fund features only the best performer is listed.

Figures from the Association of Investment Companies show there are four investment trusts dedicated to investing in Japanese equities, while five more target small and mid-caps in particular.

Best performing Japanese investment trusts over the last five years

Investment Trust EPIC Market cap
£ million
Annualised five-year performance Dividend yield Gearing Ongoing charge * Discount
to NAV
Morningstar rating
Baillie Gifford Shin Nippon BGS 153.9 26.1% n/a 6% 1.17% -0.1% *****
Baillie Gifford Japan BGFD 349.7 22.0% n/a 13% 0.89% 0.5% *****
Schroder Japan Growth SJG 196.6 14.8% 1.1% 13% 1.37% -4.9% *****
Atlantis Japan Growth AJG 50.3 14.1% 0.0% 10% 3.02% -11.6% ***
JP Morgan Japanese JFJ 459.6 13.6% 1.0% 4% 0.78% -12.3% ****

Source: Morningstar and the AIC, for Japan and Japanese Smaller Companies Categories. * Includes performance fee

For the investors who prefer the low-cost, tracker option there is a good selection of exchange-traded funds (ETFs) too. Would-be buyers of Japan may like to consider whether to manage their exposure to the yen, by investigating currency-hedged funds or exchange-traded funds (ETFs).

Best performing Japanese Equity ETFs over the last five years

ETF EPIC Market cap
£ million
Annualised five-year performance Dividend yield Fund Ongoing Charge Morningstar rating Replication method
iShares Core MSCI Japan IMI (USD) IJPA 706.3 12.9% n/a 0.20% **** Physical
iShares MSCI Japan Small Cap (Dist) USD IDJP 164.3 9.8% 1.1% 0.58% *** Physical
db x-trackers MSCI Japan (DR) 1C USD XMJD 810.0 5.1% n/a 0.50% *** Physical
HSBC MSCI Japan (GBP) HMJP 130.5 4.9% n/a 0.40% **** Physical
iShares MSCI Japan (Dist) GBP IJPN 1,889.2 4.9% n/a 0.59% **** Physical

Source: Morningstar, for Japan Large-Cap Equity and Japan Small/Mid-Cap Categories. Physical ETFs only. Where more than one class of fund features only the best performer is listed.

These products do tend to come with a higher ongoing charge but if the yen does continue to weaken then the additional costs could prove worth it. According to Morningstar around 17 OEICs provide this service, although only half a dozen of them have a five-year trading history.

Ten ETFs also offer currency hedges although none have a five-year history and most are less than a year old.

AJ Bell’s top tracker for Japan

AJ Bell’s free investment guidance service is based on our list of sixteen Top Trackers. One of these directly covers Japan and one more gives a role to Japanese stocks.

The Vanguard FTSE Japan tracker has the EPIC code of VJPN and a SEDOL of B9L8M65.

It aims to deliver the performance of the FTSE Japan index, which includes 477 stocks listed on the Tokyo stock market.

This tracker represents 9% of the Adventurous portfolio.

The iShares Core MSCI World tracker has the EPIC code of SWDA and a SEDOL of B4L60Z9.

The index contains over 1,600 large- and mid-cap companies from 23 different developed stock markets, including Japan, which has a weighting of 9%. This tracker is 14% of the Cautious portfolio and 31% of the Balanced one. It does not feature in the Adventurous portfolio.

These articles are for information purposes only and are not a personal recommendation or advice. All data shown is correct at the time of writing.

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