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Japan: Short-term wins or long-term losses?

Finance Blogger: Anthony Harrington Anthony Harrington

The Association of Investment Companies (AIC) is the latest organisation to take a stab at anatomising the prospects of Japan’s economy. As the AIC notes in its July 2010 report, “An outlook for Japan and Japanese investment companies”, the country has a really mixed investment history and has been the graveyard of more than a few fund manager reputations.

Japan has just recently seen the appointment of new Prime Minister Naoto Kan plus elections for the House of Councillors, the Japanese Upper House, which took place on July 11. Those elections did not help the new Prime Minister’s cause. Kan’s government holds a majority in the Japanese lower chamber but it lost control of the House of Councillors, winning 113 out of 242 seats, a result that threaten’s “legislative paralysis” according to the Telegraph’s Tokyo correspondent, Julian Ryall. Obviously, a country with two lost decades and a fistful of zombie banks needs legislative paralysis like it needs the plague. But Japanese businesses are accustomed to operating in less than benign conditions, they’ve been doing so for the last 20 years, after all. So it is not easy to extrapolate from political malaise to corporate performance.

That corporates have suffered badly from time to time through Japan’s stagnant years is obvious. However, there is a big difference, as the AIC makes clear, between a five year view of investment performance and a view of the last twelve months. The Japanese Smaller Company sector, for example, is down 43% when you take a five-year perspective on things. However, over the last year the sector is up 12%, year on year. For investors looking at a one-year horizon, in an era where cash is probably generating a negative return after inflation, 12% looks very good indeed. Not surprisingly fund managers specialising in the Japanese economy tend to be swayed by the one-year view, which promises significant returns, rather than by worries over how those returns might flip-flop given a five-year time horizon. One of the most positive features cited by fund managers, the AIC found, was the fact that Japan’s export industry is once again doing well.

The AIC quotes Andrew Rose, fund manager of Schroder’s Japan Growth fund:

"We believe the underlying positive case for recovery in Japan remains intact. Export data remains strong, and although the external side of the Japanese economy is outpacing the domestic, we expect to see clearer signs of improvement at home over the coming months. The stock market should be supported by the renewed fiscal stimulus and easy monetary policies - unlike some other parts of the world; we do not see the Japanese authorities starting to exit their loose monetary stance in the near future.”

That is a pretty safe bet. The Japanese, after all, have made the mistake of withdrawing quantitative easing too early on numerous occasions over the last 20 years. In fact they did it so often that the Japanese public find it very difficult to convince themselves that the Government won’t choke off the stimulus too early yet again. It seems likely however, that Rose is right and that pessimism on this score is not well founded. Deflation lurks constantly as a threat and the government has learned that a bit of inflation is no bad thing under those circumstances.

Further reading on Japan and the Japanese economy

Tags: fiscal stimulus , Japan , stocks and shares , transparency , zombie banks
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