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Japan at crossroads


Prime Minister Shinzo Abe’s call for a snap general election and the delay in the second sales tax hike until April 2017 should encourage spending by individuals and investment by companies, says Sam Perry, senior investment manager of Japanese equities at Picket Asset Management…

As rising inflation turns cash from a defensive asset to a wasting asset, companies will begin to normalise their balance sheets and invest their vast cash piles. We will then naturally see an increase in the RoEs of corporate Japan and with it, a closing of the valuation gap that exists between Japan’s stock market and that of its international peers’ says Sam Perry, senior investment manager of Japanese equities at Pictet Asset Management.
Over the past two years, cash hoarding of Japanese firms has come to a halt and there is growing evidence that net cash levels among these are starting to decline gradually after peaking at 30 per cent of gross domestic product in 2012.
We think the latest policy moves, especially those of the BOJ and GPIF will also help speed up structural changes that have begun to take root in corporate Japan over the last couple of years.
We expect to see a growing number of companies respond positively to such changes: the promise of a place in Japan’s premier equity benchmark is sure to encourage them to spend cash and improve efficiency.
Together, such efforts promise to bring an end to Japan’s poor record on corporate governance. No longer will Japanese executives, for so long cushioned by a cosy web of cross shareholdings, be able to put their interests above those of the shareholders they are supposed to serve. In this new era, they have to put cash to work, improve corporate governance and maximise value for shareholders.
Those bearish on Japanese stocks may argue that such moves count for nothing if the economy remains weak. However, there are signs that after the post tax-hike slump, growth is returning with retail sales climbing back and a very tight labour market promising further wage growth.  This, along with the BOJ’s expanded QE programme, should help Japan reach its underlying inflation target of 2 per cent, which should in turn encourage domestic investors rotate into risk assets such as equities away from government bonds.

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