Feature – Japan
ing from the post-Covid drive for digital efficiency in Japan; and Tokyo-based renewable energy provider Renova,” he says. Putting the number of positives together makes for a compel- ling case for Japan. That positive outlook includes Japan having the highest consensus GDP growth among developed econo- mies for 2023, the most accommodative monetary policy – when base interest rates of leading central banks are compared – and a sharply improving governance story.
On the latter point, examples include the rising number of external directors in Japan’s boardrooms. This presents under the radar investment opportunities for investors, if they do the necessary legwork, Kaye says. “Japanese companies remain under-researched compared to their global peers and as a result, investors could find some bargains among leading, but misunderstood, companies,” he adds.
Real value Maeda’s positive view on Japan is also supported by the scope for ongoing improvements in corporate governance to gener- ate real value for investors.
“This is partly a qualitative assessment through our discus- sions with company managements, but there are also measur- able impacts,” he says. “These include improving return on equity and a record level of share buybacks announced in the current fiscal year. These factors improve potential returns for investors.” Maeda adds that this feeds into the success of Japanese corpo- rates and their relative attractiveness from an investor perspective. “Regardless of the successive delays in Japan’s domestic eco- nomic recovery, and heightened global uncertainty, Japanese corporations appear to be performing well and quarterly results announced during 2022 have been consistently ahead of expectations,” he adds.
Policy shift But there are issues that could stall such an optimistic outlook. And the stifling influence comes from an unlikely source in the Bank of Japan (BOJ), which made a subtle but important policy shift just before Christmas. This saw the Bank announce that it is relaxing its yield curve control policy. An obscure policy, but one that enabled the Japanese 10-year bond yield to reach 0.50%, double the size of the previous cap. Although on one level quite an opaque move, markets were taken by surprise.
This is because the yield curve control policy has been, accord- ing to the Royal Bank of Canada, “a broadly successful policy to date”. The context and rationale for the shift is not difficult to ascertain. Inflation has returned to Japan, reaching 3.8% in
40 | portfolio institutional | February 2023 | Issue 120
November last year, comfortably above the BoJ’s 2% target, and the economy is picking up momentum as it re-opens following the end of the Covid restrictions. So, the move was understandable. But it could have negative implications for investors, according to Marcel Thieliant, senior Japan, Australia and New Zealand economist at researcher Capital Economics. “The jump in bond yields and the further strengthening of the yen following the widening of the Bank of Japan’s tolerance band for 10-year government bond yields will lower the value of assets owned by Japanese investors.
“Insurance firms will be most affected by falling bond prices, whereas pension funds have most to lose from a stronger exchange rate,” he adds. “However, we doubt that lower invest- ment returns carry systemic risks.”
Investors will now wonder whether the higher cap marks the onset of a more aggressive stance for the BoJ. This is because the precedent, set down in Europe, means a new and less appealing path opens up for Japan. For example, in December 2021, after European 10-year yields had been below zero for close to three years, European Central Bank (ECB) president Christine Lagarde stated emphatically that it was “very unlikely” interest rates would go up in 2022.
In fact, 2022 marked the ECB’s most aggressive rate cycle in its 24-year history, with rates climbing 2.5% within five months. Hence, BoJ governor Kuroda might have difficulty convincing investors that further policy “normalisation” – whatever that looks like – is not on the way. But he departs the role in April,
While a global recession is now looking increasingly likely, Japan is at a different stage of its economic cycle and there is potential for GDP to continue to grow above its long-term trend
rate in 2023. Ken Maeda, Schroders
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34 |
Page 35 |
Page 36 |
Page 37 |
Page 38 |
Page 39 |
Page 40 |
Page 41 |
Page 42 |
Page 43 |
Page 44
