Has Abenomics run out of steam? If the headlines are to be believed the third arrow of Prime Minister Shinzo Abe’s economic reform plan has failed to hit its target. The Japanese economy contracted 1.6% in the second quarter of this year and the stock market around 2,000 points over the past month.
But defenders of Abe point out that one bad quarter does not a recession make – after all, the US economy shrunk in the first three months of both this year and 2014. And Japan’s contraction is mostly due to factors outside of Abe’s control; that is a drop in exports to troubled China. Today’s 4% fall in the Japanese stock market is also the fault of China.
“Japan’s reforms are not failing to hit target, Abenomics is working,” said George Boyd-Bowman, manager of the Neptune Global Income fund. “We have pretty concrete evidence that first two arrows are hitting target – corporate earnings among the largest Japanese companies are 130% higher, the yen is weaker, land prices are rising for first time in decades and unemployment is at a 17 year low.”
Nicholas Weindling, fund manager of the JPMorgan Japanese Investment Trust (JFJ) reminds the naysayers that Rome wasn’t built in a day.
“We believe that the policy makers’ commitment to end deflation - and bring back growth in the Japanese economy - remains intact and that it is too early to assess the efficacy of Abenomics,” he said.
What are the Benefits for Investors?
The third arrow of Abenomics tackles structural reform – including among corporates. While Abe has not specifically stated that a rising stock market is the aim of his plans, Boyd-Bowman says it is “very much an intended effect”.
“There has been less progress with arrow three than some had hoped for, but these reforms have been long planned and will take time to be executed,” he said.
Where Abenomics has been a success is in convincing Japanese companies to prioritise shareholders, resulting in an emerging dividend culture.
“For long time Japanese companies have had the capacity to pay dividends, they just have not chosen to. The top 90 largest companies in Japan have cash reserves of 80 trillion yen – the equivalent of $650 billion. You could triple that for all listed companies,” said Boyd-Bowman.
The creation of Nikkei 400, an index which requires companies to meet a number of criteria which show they are shareholder friendly was a start. As was the stewardship code – a formal agreement that Japanese companies had to sign modelled on the way UK companies treat shareholders.
Of course, there is still some way to go. Toshiba is one example of badly behaved old Japan, a recent accounting scandal means the company has been kicked out of the Nikkei 400.
But there are plenty of companies moving in the right direction. Boyd-Bowman highlights Amada, a manufacturing company which makes machinery and tools. It was not included in the Nikkei 400 when it launched, five months later the lack of inclusion in the so-called “shame index” had led the company to ramp up their pay-out ratio through dividends and buy-backs and it was included.
These companies are trading at a premium – highlighted as “better” by officials they are priced as such. The trick is to find companies just before their inclusion – before the cash hoarders turn into cash machines.
Is this sustainable? These companies have been hoarding cash for a very long time, and will be able to have sustainable dividend growth for some time, says Boyd-Bowman. The share buy-back schemes will in time be switched off, but the dividends are sustainable. Currently UK companies have an average pay-out ratio of 60%, while in Japan it is just 30%.
Unsurprisingly Boyd-Bowman is overweight Japan, with 25% of his global fund in the region compared to the average weighting for the global income sector of 6%.
“Japan has best country level dividend story in the world,” he says – adding that should the market dip further he will be adding to his position.
He is not the only one - Peter Fitzgerald, head of multi-asset at Aviva Investors added to equity positions in continental Europe, Japan and the US in recent days, and views any further bouts of extreme volatility as an opportunity to add exposure to these regions.
Eric Verleyen of Societe General Private Bank added that he was avoiding emerging markets as the bumpy ride may continue, but that within developed markets, he favoured Europe and Japanese markets which still offer a compelling mix of monetary accommodation and stronger growth momentum.
