Liontrust Views Autumn 2022 - Magazine - Page 9
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Signs of life have emerged as Japan’s main stock market, the
Nikkei, breached 30,000 for the first time in three decades in
February, and the country was among the world’s most resilient
economies in 2020. Japan is also in the spotlight as Tokyo hosts
the delayed 2020 Olympic Games despite slow progress on
vaccinations and therefore no paying spectators.
Japan has a large proportion of cyclical and value businesses
and its broad exposure to industrials and exporters means
the country is well placed amid the current global economic
rebound. Corporate debt is also low and companies, on the
whole, are managed sensibly and conservatively. The long-term
criticism has been that they are also run without much diversity,
transparency or for the benefit of external shareholders.
A practice known as cross-shareholding has traditionally been
seen as the worst example of poor transparency, where Japanese
companies invest in each other and protect underperforming
management teams via a cushion of automatic shareholder
support. Critics suggest this has fostered complacency, low
returns and poor governance, but changes to the corporate
code and new listing rules on the Tokyo Stock Exchange suggest
the practice could be edging closer to extinction.
To deal with the other ‘mired in deflation’ criticism, structural
changes ushered in by former prime minister Shinzo Abe’s
‘Abenomics’ programme have been effective in pulling Japan
out of its long slump, stretching back to the 1990s. In fact, the
situation had changed to such an extent that Bank of Japan (BoJ)
Governor Haruhiko Kuroda declared ‘victory’ in July 2019,
claiming that for the first time in 15 years the economy was no
longer in deflation. Covid-19 has turned things on their head,
however, and hit spending on services, which makes up around
a third of total consumption in Japan. While deflation is not
expected to return, Kuroda has acknowledged the need for
vigilance on prices.
There are also growing fears that Japan’s progress could
be derailed as the country tries to contain its latest wave of
Coronavirus and speed up vaccinations. It is difficult to know
what impact this might have but it seems sensible to suggest that
while the country is set to benefit from a global rebound, its own
domestic recovery could be impacted.
With Japan’s stock market back at levels last seen in 1990
and long-term threats of deflation and cross-shareholdings
moving towards the past tense, we continue to see reasons to
be positive about a cheap stock market with a cyclical bias. As
events in India have shown, however, no one can afford to be
complacent and we are keen to see the vaccination programme
accelerate, especially with the eyes of the world on the country
during the Olympic festivities.
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