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New leader Kishida could herald new dawn for Japan
Japan’s stock market enjoyed a recent surge following the resignation of increasingly unpopular prime minister Yoshihide Suga.
The Nikkei 225 index reaching a 31-year high in September as the whole Tokyo stock exchange cheered Suga’s departure.
Japan bulls are hoping the arrival of new PM Fumio Kishida can provide the impetus for a fresh rally, though markets are trying to work out just how his leadership could influence areas like fiscal stimulus, foreign policy, and taxation.
Kishida has emphasised continuity and is unlikely to deviate significantly from the long term economic policy established by Shinzo Abe (Abenomics) or the renewable energy goals and digitalisation strategies introduced by Suga, the outgoing leader.
Kishida is expected to roll out redistribution of household income. Structural reforms may be less of a priority, given that deregulation has been widely blamed for increasing inequality in the world’s third biggest economy.
Japan’s ruling Liberal Democratic Party (LDP), expected to win the general election that will be held at the end of October, has chosen its new leader in the form of Kishida, regarded as something of a continuity candidate.
Masaki Taketsume, manager of Schroder Japan Growth Fund (SJG), says Kishida inherits a much brighter situation than
his predecessor as the pandemic-induced state of emergency is lifted.
While the change of PM has raised concerns in some quarters that Japan may be heading back into an era of political instability and short prime ministerial terms, Taketsume isn’t especially worried.
‘After all, Shinzo Abe was Japan’s longest-serving PM (with his second term lasting from 2012 until 2020), so any subsequent incumbent was always likely to serve a shorter term in office’, he explains.
Public dissatisfaction with Japan’s slow vaccine rollout was one of the main reasons that Suga stepped down. However, Taketsume says the vaccination campaign ‘has accelerated substantially in recent months’, so much so that Japan has now ‘fully vaccinated a larger share of its population than the US, despite a much slower start’ and lifted its state of emergency at the end of September.
‘While Japan has benefited from the broader global economic recovery this year, we should now start to see the domestic economy re-open and recover’, insists Taketsume, who has identified Japanese small caps as particular beneficiaries.
The Schroders stock picker also points out earnings momentum is still accelerating in the Japanese market, in contrast to other regions where upward revisions may have peaked, which corresponds ‘to the path of Japan’s slower vaccine roll-out and longer-lasting restrictions’.
GREEN IS GOOD
Taketsume largely anticipates a continuation of government policy under new broom Kishida. ‘A new supplementary budget and further stimulus is already under discussion,’ he explains.
He does sees environmental issues rising up the agenda under Kishida with COP26 on the horizon and Japan among those countries that have pledged to reach net zero carbon emissions by 2050. Suga also declared the more ambitious goal of cutting emissions in 2030 by 46% relative to 2013 levels.
‘In my view, it will be Abenomics 2.0’, chips in Richard Kaye, one of the trio of managers guiding Comgest Growth Japan (BYYLQ08). Kishida has been vocal on stimulus measures for the economy, so ‘we’ll have the reopening dividend’ according to Kaye, who adds Kishida is ‘clear on the need to push the digitalisation trend that Suga talked about but never really implemented’.
Also weighing in is Richard Aston, manager of CC Japan Income & Growth (CCJI), the trust scouting for strong dividend growth in a nation of cash-rich corporates that have shown admirable dividend-paying resilience during the pandemic.
One area Aston believes will remain outside of Kishida’s influence is corporate governance reform.
‘There’s no question that government intervention was critical in initially getting corporate governance reform off the ground. However, it has enough momentum behind it to continue growing beyond the influence of the political sphere,’ he says.
By far the biggest reason for this, says Aston, is the Tokyo Stock Exchange, ‘which is currently finalising its biggest ever reorganisation’.
‘This includes everything from high levels of liquidity and standards of shareholder treatment to minimum thresholds for tradable market capitalisation. And it is this wave of effort to conform with the market’s new standards alone that suggests improving corporate governance standards will continue to be a major focus for Kishida and Japan’s corporates long into the future.’
Baillie Gifford Japan Trust (BGFD) 986p
Recent share price weakness at Baillie Gifford Japan (BGFD) presents an attractive entry point for an actively-managed, quality-growth oriented trust with a fantastic long-run record of outperforming the TOPIX and a competitive ongoing charge of 0.68%. The Matt Brett-managed trust invests in medium to smaller-sized companies with above average prospects for growth, which may come from innovative business models, the disruption of traditional Japanese practices or overseas opportunities.
Comgest Growth Japan (BYYLQ08) £14.65
Quality-growth investors with a long-term horizon might also consider Comgest Growth Japan (BYYLQ08). Managed by Richard Kaye, Chantana Ward and Makoto Egami, the fund is ‘trying to find the very best companies in Japan’ according to Kaye and offers a play on themes including Japan’s improving corporate governance and digital transformation.
Schroder Japan Growth (SJG) 222p
According to FE Fundinfo, Schroder Japan Growth (SJG) has lagged sector peers with a 10-year total return of 155.07%, reflected in a 7.28% discount to net asset value. Yet this suggests there’s underlying value to be unlocked here for capital growth-focused investors. And the trust offers exposure to selective Japanese small caps exposed to the domestic service sectors where Taketsume anticipates a strong recovery.