October was a bad month for Japanese equities. The Nikkei fell steadily from 16,374 at the end of September to just 14,532 three short weeks later.
It seemed the market had lost faith in Abenomics and the Nikkei was doomed to repeat the cycles of years past – six to 12 months of promising gains, followed by crashing losses. But just at the very last minute, the powers-that-be announced two big boosts for both the domestic economy and the market, sending stocks soaring on Friday afternoon.
The first surprise came in the form of another round of quantitative easing, confirming that the Bank of Japan would be bond buying in a bigger, badder way than before. Swiftly following that announcement was the news that the Japanese pension fund GPIF would be upping its allocation to domestic equities to 25% - equating to an estimated $2 trillion of investment.
Trading was closed on Monday because of a national holiday, but by close of play Tuesday Japanese stocks had climbed to a seven-year high. They fell by only a couple of points over the following 24 hours, and sentiment remains upbeat.
It is suspected that deflationary fears fuelled the decisions to boost markets and the economy. Bond buybacks in particular will weaken the yen, and help inflation climb from its current rate of between 1 and 2%.
A weak currency will also help exporters who are struggling to meet demand thanks to labour shortages, hopefully bringing in much needed cash to help the companies expand. The shrinking and ageing population in Japan is affecting domestic companies; although unemployment is at extremely low levels there are simply not enough people of working age to help increase productivity, output and ultimately revenues.
In order to stabilise the population every woman of child bearing age would have to have four children – but the trend is for women to have fewer children, much later in their lives than previous generations.
Baillie Gifford Japanese fund manager Matthew Brett said that the shrinking population coupled with employment restrictions was hurting industrial companies.
“The problem of a shrinking population is not unique to Japan,” he said. “The UK has one based purely on birth rate, but immigration boosts our population. Italy has a similar problem. Japan does not have a history of immigration but it is something they may have to consider to provide long-term economic stimulus.”
Exacerbating the problem are employment restrictions that mean Japanese companies cannot make workers redundant and hire instead more efficient and focused roles. But this should ease thanks to Prime Minister Abe’s plans to introduce special economic zones where these restrictive employment laws do not apply, thus helping industrial companies that need to streamline their businesses.
As a result of the uneven demographics Brett says the best opportunities are among large global exporting companies and nimble smaller companies that have domestically focused revenues.
