This site uses cookies.  By continuing to browse this site you are agreeing to our use of cookies.   Find out more.

Stop Betting Against Japan

September 2013

Miyuki Kashima

Miyuki Kashima

Managing Director, Head of Japanese Equity Investment
BNY Mellon Asset Management Japan*

Executive Summary

During its past two decades of economic torpor, many foreign investors have been wary of Japan's equity market. But the economic reforms undertaken by Prime Minister Shinzo Abe and his government may be enough to change that, says Miyuki Kashima, managing director and head of the Japanese equity investment division at BNY Mellon Asset Management Japan Limited. We recently spoke with Kashima about why she believes this government's reforms might succeed where others have failed and why the Japanese equity market is ripe for rediscovery by global investors accustomed to overlooking the world's third-largest economy.

QUESTION:  Japan has been caught for what seems like forever in a trough of weak growth, massive government debt and deflation. Furthermore, its population is aging and its consumers prefer to save rather than spend. These are not usually the fundamentals that drive equity rallies. Why are you bullish on Japan right now?

MIYUKI KASHIMA:  Japan is not a country that likes rapid change, but after 20 years of stagnation, the economy is finally at a major inflection point and the willingness of the people to accept changes this time, even some unpleasant ones, is quite impressive. Recent public opinion polls show support for Abe's cabinet rising to 68 percent from 63 percent in July, and more than 70 percent support his increase in the consumption tax. The speed of Abe's policy changes has been as surprising as the nation's willingness to embrace change. One of those policy initiatives is the Bank of Japan's launch of a quantitative easing (QE) program of historic proportions that will double the monetary base in two years from 138 trillion yen to 270 trillion yen. The BoJ will also double the size of its asset purchase program and expand it to include long-dated bonds. This is an ambitious goal because the bank has also set a target inflation rate of 2 percent and intends to lower real interest rates. The timing of Japan's QE program could have a major impact on equity markets because it comes as central banks in other countries such as the U.S. are winding down similar programs. It also helps to weaken the yen. Beyond the immediate impact of the QE program, the government is also enacting other reforms that will benefit equities over the longer term.

QUESTION:  How does Abe's approach differ from what has been tried in the past?

MIYUKI KASHIMA:  Abe has the political mandate to take on entrenched interests that have frustrated the weaker politicians who preceded him. Only one Japanese prime minister in the last 20 years has held office for much more than a year. But Abe won the support of a two-thirds majority in the lower house of Parliament last December, and a coalition led by his Liberal Democratic Party gained an upper house majority in July. He's likely to have three to four years in office, which puts him in a strong position to execute his plan. He's simultaneously changing monetary, fiscal and growth policies with unprecedented speed and scale. In my view, choosing Haruhiko Kuroda as the new governor of the Bank of Japan was a major step forward. Kuroda was Abe's choice, rather than a consensus pick and he has demonstrated that his decisions are fast and bold, just as the prime minister wants them to be.

QUESTION:  What other initiatives besides an expansive monetary policy is Abe implementing?

MIYUKI KASHIMA:  Abe is adopting a flexible fiscal policy designed to fund public works and other stimulus projects to offset the potential disruption caused by longer-term changes such as the rise in the consumption tax. The government is also trying to stimulate private sector capital spending and job creation through targeted tax changes and is asking companies to pay their workers more in order to stimulate consumption. The third piece of Abe's strategy is a variety of initiatives meant to foster growth. They include joining the Transpacific Partnership (TPP) talks, encouraging greater investment by corporations and broader Asia-Pacific trade, expanding the number of women in the workforce, tax cuts and deregulation.

QUESTION:  You say that for the first time there is a real prospect of reversing deflation and yen strength, two of the biggest problems that have plagued Japan and its stock market for a good part of the last two decades. Why is that so important?

MIYUKI KASHIMA:  The strength of the yen has a strong psychological effect on the market, even if it has a less powerful effect on the real economy. Exports count for only about 15 percent of Japan's GDP. The prospect of continuing deflation has also affected the thinking of Japanese companies and consumers. If you believe that everything will be cheaper in a year or two than it is today, you are very unlikely to want to spend or invest. That's been the widespread belief in Japan for a long time and it has helped keep the economy from recovering.

QUESTION:  Japan has tried a variety of things in the past to get its economy moving that haven't worked. Why do we think this time it will be different?

MIYUKI KASHIMA:  Japan has disappointed investors many times in the past, but the magnitude, quality and clarity of the quantitative easing plan have surprised everybody. There are signs that Abe's reforms are already producing results. The yen is weaker. Big companies have started to raise wages. They also expect to increase hiring by 10 percent next year. Inflation continues to creep upward. Beyond these indicators of short-term improvement, there are also longer-term reasons for hope.

There has not been this kind of concerted effort to change fiscal, monetary and economic growth policies at the same time in the past 25 years. The emphasis on actionable plans to spur companies to invest and attract more women into the labor force is new. Companies have cash to spend on investment that they have held onto because deflation discouraged investment. If companies see signs of deflation reversing and the yen weakening, they are in a good position to start spending. Consumers and banks are in the same situation. Japan's banks currently have a loan-to-deposit ratio of only 60 percent. There's a lot of cash waiting for an environment in which spending and borrowing make sense.

QUESTION:  Why is the government trying to get more women to work outside the home?

MIYUKI KASHIMA:  Partly it's a way to expand the size of the labor pool without changing immigration policy. Japan is an aging country and its supply of workers has been shrinking since 1995. That effectively limits the ability of companies to meet their need for workers as economic growth returns. Japanese women also have one of the world's lowest rates of economic participation and opportunity. Increasing the number of women in the workforce both expands the labor pool and increases the potential of Japanese households to drive economic growth through more consumer spending.

QUESTION:  That sounds like a fairly radical transformation for a society that doesn't necessarily like change.

MIYUKI KASHIMA:  A lot of Japanese women want this kind of change. The Ministry of Internal Affairs says that seventy nine percent of women aged 35 to 39 say they want to go back to work after having children, but only 34 percent are actually able to do so. One big reason is a lack of childcare. Abe is the first prime minister to emphasize the importance of women participating in the work force. He's planning to increase the number of available places in daycare by 200,000 by 2015 and an additional 200,000 by 2018. He's also urged all listed companies to add at least one female director to their boards.

QUESTION:  What convinces you that a Japanese equity rally has room to run?

MIYUKI KASHIMA:  Looking at earnings per share shows that the Japanese market is still undervalued, even after its recent rise. Trailing weighted earnings per share for the TOPIX is still below the level it was at prior to the Lehman crisis. Now with the yen trading at 100 to the U.S. dollar, we expect earnings per share growth of about 40 percent during the current fiscal year. Also, many global investors, if not most, are still underweight Japan. Furthermore, Japanese institutional investors have been selling into the current rally and Japanese retail investors continue to have very little exposure to equities. On average, according to the BoJ, less than 7 percent of households' financial assets are invested in stocks. For these reasons, I believe the Japan recovery story has just begun and the time has come to stop betting against the Japanese market and Abenomics.


* BNY Mellon Asset Management Japan Limited does not offer services in the U.S.

BNY Mellon Investment Management is one of the world's leading investment management organizations and one of the top U.S. wealth managers, encompassing BNY Mellon's affiliated investment management firms, wealth management organization and global distribution companies. BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation and may also be used as a generic term to reference the Corporation as a whole or its various subsidiaries generally. · The statements and opinions expressed in this document are those of the authors as of the date of the article, are subject to change as economic and market conditions dictate, and do not necessarily represent the views of BNY Mellon, BNY Mellon Asset Management International or any of their respective affiliates. This document is of general nature, does not constitute legal, tax, accounting or other professional counsel or investment advice, is not predictive of future performance, and should not be construed as an offer to sell or a solicitation to buy any security or make an offer where otherwise unlawful. The information has been provided without taking into account the investment objective, financial situation or needs of any particular person. BNY Mellon Asset Management International Limited and its affiliates are not responsible for any subsequent investment advice given based on the information supplied.

Past performance is not a guide to future performance. The value of investments and the income from them is not guaranteed and can fall as well as rise due to stock market and currency movements. When you sell your investment you may get back less than you originally invested. · While the information in this document is not intended to be investment advice, it may be deemed a financial promotion in non-U.S. jurisdictions. Accordingly, where this document is used or distributed in any non-U.S. jurisdiction, the information provided is for use by professional and wholesale investors only and not for onward distribution to, or to be relied upon by, retail investors. · Products or services described in this document are provided by BNY Mellon, its subsidiaries, affiliates or related companies and may be provided in various countries by one or more of these companies where authorized and regulated as required within each jurisdiction. This document is not intended for distribution to, or use by, any person or entity in any jurisdiction or country in which such distribution or use would be contrary to local law or regulation. This document may not be distributed or used for the purpose of offers or solicitations in any jurisdiction or in any circumstances in which such offers or solicitations are unlawful or not authorized, or where there would be, by virtue of such distribution, new or additional registration requirements. Persons into whose possession this document comes are required to inform themselves about and to observe any restrictions that apply to the distribution of this document in their jurisdiction. The investment products and services mentioned here are not insured by the FDIC (or any other state or federal agency), are not deposits of or guaranteed by any bank, and may lose value. · This document should not be published in hard copy, electronic form, via the web or in any other medium accessible to the public, unless authorized by BNY Mellon Investment Management International Limited.

In Australia, this document is issued by BNY Mellon Investment Management Australia Ltd (ABN 56 102 482 815, AFS License No. 227865) located at Level 6, 7-15 Macquarie Place, Sydney, NSW 2000. Authorized and regulated by the Australian Securities & Investments Commission. · In Brazil, this document is issued by BNY Mellon Serviços Financeiros DTVM S.A., Av. Presidente Wilson, 231, 11th floor, Rio de Janeiro, RJ, Brazil, CEP 20030-905. BNY Mellon Serviços Financeiros DTVM S.A. is a Financial Institution, duly authorized by the Brazilian Central Bank to provide securities distribution and by the Brazilian Securities and Exchange Commission (CVM) to provide securities portfolio managing services under Declaratory Act No. 4.620, issued on December 19, 1997. · Securities in Canada are offered through BNY Mellon Asset Management Canada Ltd., registered as a Portfolio Manager and Exempt Market Dealer in all provinces and territories of Canada, and as an Investment Fund Manager in Ontario. · In Dubai, United Arab Emirates, this document is issued by the Dubai branch of The Bank of New York Mellon, which is regulated by the Dubai Financial Services Authority. · If this document is used or distributed in Hong Kong, it is issued by BNY Mellon Investment Management Hong Kong Limited, whose business address is Suites 1201-5, Level 12 Three Pacific Place, 1 Queen's Road East, Hong Kong. BNY Mellon Investment Management Hong Kong Limited is regulated by the Hong Kong Securities and Futures Commission and its registered office is at 6th floor, Alexandra House, 18 Chater Road, Central, Hong Kong. · In Japan, this document is issued by BNY Mellon Asset Management Japan Limited, Marunouchi Trust Tower Main Building, 1-8-3 Marunouchi Chiyoda-ku, Tokyo 100-0005, Japan. BNY Mellon Asset Management Japan Limited is a Financial Instruments Business Operator with license no 406 (Kinsho) at the Commissioner of Kanto Local Finance Bureau and is a Member of the Investment Trusts Association, Japan and Japan Securities Investment Advisers Association. · In Korea, this document is issued by BNY Mellon AM Korea Limited for presentation to professional investors. BNY Mellon AM Korea Limited, 29F One IFC, 10 Gukegeumyung-ro, Yeongdeungpo-gu, Seoul, 150-945, Korea. Regulated by the Financial Supervisory Service. · In Singapore, this document is issued by The Bank of New York Mellon, Singapore Branch for presentation to professional investors. The Bank of New York Mellon, Singapore Branch, One Temasek Avenue, #02-01 Millenia Tower, Singapore 039192. Regulated by the Monetary Authority of Singapore. In Singapore, this document is to be distributed to Institutional Investors (as defined in the Securities and Futures Act, Chapter 289 of Singapore) only. · This document is issued in the UK and in mainland Europe, by BNY Mellon Asset Management International Limited, 160 Queen Victoria Street, London EC4V 4LA. Registered in England No. 1118580. Authorized and regulated by the Financial Conduct Authority. · This document is issued in the United States by BNY Mellon Investment Management.

BNY Mellon owns over 95% of the parent holding company of The Alcentra Group, which is comprised of the following affiliated investment advisers: Alcentra, Ltd and Alcentra NY, LLC. · BNY Mellon ARX is the brand used to describe the Brazilian investment capabilities of BNY Mellon ARX Investimentos Ltda. · BNY Mellon Western FMC, Insight Investment and Meriten Investment Management do not offer services in the U.S. This presentation does not constitute an offer to sell, or a solicitation of an offer to purchase, any of the firms' services or funds to any U.S. investor, or where otherwise unlawful. · BNY Mellon Cash Investment Strategies is a division of The Dreyfus Corporation. · BNY Mellon Western Fund Management Company Limited is a joint venture between BNY Mellon (49%) and China based Western Securities Company Ltd. (51%). The firm does not offer services outside of the People's Republic of China. · BNY Mellon owns 90% of The Boston Company Asset Management, LLC and the remainder is owned by employees of the firm. · BNY Mellon owns a 19.9% minority interest in The Hamon Investment Group Pte Limited, the parent company of Blackfriars Asset Management Limited and Hamon Asian Advisors Limited both of which offer investment services in the U.S. · Services offered in the US, Canada and Australia by Pareto Investment Management Limited under the Insight Pareto brand. · The Newton Group ("Newton") is comprised of the following affiliated companies: Newton Investment Management Limited, Newton Capital Management Limited (NCM Ltd), Newton Capital Management LLC (NCM LLC), Newton International Investment Management Limited and Newton Fund Managers (C.I.) Limited. NCM LLC personnel are supervised persons of NCM Ltd and NCM LLC does not provide investment advice, all of which is conducted by NCM Ltd. Only NCM LLC and NCM Ltd offer services in the U.S. · BNY Mellon owns a 20% interest in Siguler Guff & Company, LP and certain related entities (including Siguler Guff Advisers LLC). · BNY Mellon Asset Management International Limited and any other BNY Mellon entity mentioned above are all ultimately owned by BNY Mellon, unless otherwise noted.

© 2013 The Bank of New York Mellon Corporation. All rights reserved.