Download Japan`s Rising Opportunity

February 2014
Japan White Paper
Japan’s Rising Opportunity
As Prime Minister Shinzo Abe and his Liberal Democratic Party exercise majority control of
the Japanese government, they have a unique opportunity to freely implement the “Three Arrows”
of “Abenomics”, a three-pronged economic reform effort targeted at reversing almost two decades of
slow growth and deflation in the world’s third largest economy. Early signs have been positive, and if
Abe and his supporters are successful, Japan could become a compelling investment opportunity for
the foreseeable future.
Executive Summary
After WWII, the Japanese economy began what is sometimes referred to as the “Economic
Miracle”, a three-decade long period of growth and prosperity. Japanese firms and their
management teams were studied around the world as the model of efficiency and an
example for all companies and leaders to strive for. In 1989, a bubble in real estate fueled by
speculators burst, and the Japanese markets crashed. Since then, the Japanese economy has
been in a virtual standstill with more than two decades of stagnant growth and a deflationary
environment. Despite lasting more than 20 years, this time period has been referred to as the
“Lost Decade.”
With Shinzo Abe’s second term as prime minister, and the 2013 elections resulting in a majority held by
Abe’s Liberal Democratic Party, Japan is poised to turn its economic fortunes around. Abe has proposed
to propel the Japanese economy through a combination of monetary and fiscal policies and structural
changes designed to reduce regulations and stimulate private business growth. If successful, Abe
could lead Japan and its economy into a period of robust growth, and potentially provide a perfect
opportunity for investors to take part in the rebound of one of the world’s largest economies.
Tokyo Stock Exchange Market Cap
“The Three Arrows”
The current market cap of the Tokyo Stock Exchange
is still 1.3 trillion USD below its 1989 peak.
Prime Minister Abe’s reform plan for Japan centers on:
7
6
Trillion USD
1. A monetary easing policy
2. Large-scale fiscal stimulus measures
3. Structural reform aimed at reducing
1.3 Tril USD
5
4
3
regulations on private business, and
2
improving investment conditions
1
0
1980
1990
2000
2010
2013
Year
I. Monetary Policy
Source: Tokyo Stock Exchange
In January 2013, Abe and the Bank of Japan (BOJ) launched an aggressive Quantitative Easing (QE) program, similar
to what the Federal Reserve has been doing in the U.S. The BOJ’s goal has been to create an annual inflation rate
of 2% and 2% growth in GDP. In April 2013, the BOJ
began making asset purchases of 5.8 trillion Yen
Weakened Yen Leads to Higher Exports
(approximately $57 billion USD) per month with the
goal of doubling the money supply by 20151. This
is similar to the Fed’s policy; however, the BOJ is
buying ETFs and REITs in addition to bonds. These
asset purchases should stimulate prices across
The BOJ’s QE Program has led to a 21% decrease in the
value of the Yen vs. the Dollar (from 12/31/12 to 12/31/13),
resulting in a 15.3% increase in Japanese exports from the
same period, one year earlier.
20.0%
the Yen. As an export driven economy, the cheaper
16.0%
the Yen is for other countries, the more attractive
Japanese products are to foreigners, providing the
potential for significant economic growth. These
measures have been successful thus far with yearover-year (YoY) exports up by 15.3%2 and the Yen
having fallen 21% vs. the Dollar in the same time
period as of December 2013.
YoY Export Growth
all asset classes and, more importantly, devalue
12.0%
8.0%
4.0%
0.0%
-4.0%
-8.0%
-12.0%
Dec Jan Feb Mar Apr May June Jul Aug Sep Oct Nov Dec
2012 2013 2013 2013 2013 2013 2013 2013 2013 2013 2013 2013 2013
Source: Bloomberg
2
1.
2.
Bank of Japan, Introduction of the “Quantitative and Qualitative Monetary Easing,” April 2013.
Bloomberg.com, JNTBEXPY:IND.
This information discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed as research
or investment advice. Please see additional disclosures on the last page of this document.
Japan White Paper
II. Fiscal Policy
The Lost Decade: Years of
Stagnant GDP Growth
In order to stimulate private investment, the second of
Abe’s “Three Arrows” is the plan to inject 10.3 trillion Yen
Abe’s policies are attempting to reverse years of
low or declining GDP growth. Early signs point to
the “Three Arrows” achieving this goal.
(roughly $105 billion USD) into the Japanese economy
through infrastructure investment, disaster recovery and
rebuilding. Following the devastating Tsunami and nuclear
6.0%
will account for approximately 3.8 trillion Yen (almost
4.0%
$39 billion USD). Another 3.1 trillion Yen (approximately
2.0%
$32 billion USD) has been earmarked to stimulate
private investment and other measures. This stimulus is
expected to increase GDP by 2% annually and help create
600,000 new jobs3. Of course, Abe and his advisors must
walk a fine line, as this stimulus package will leave Japan
GDP Change
fallout in March 2011, disaster relief and rebuilding Japan
0.0%
-2.0%
-4.0%
-6.0%
1998
2000
with a 245% debt to GDP ratio4. Abe himself has talked
2002
2004
2006
2008
2010
2012
Year
about carefully avoiding “pork-barrel” projects which
Source: The World Bank
could undermine the market’s confidence in the desired
outcomes for the stimulus measures. However with careful planning and strategic investment, this economic
stimulus could help to kick start the next wave of Japanese economic prosperity.
III. Structural Changes
Japan has been stuck in an almost two-decade long deflationary “supercycle” which has had a major impact on
how consumers and corporations view spending and investing. If prices are going to be lower next year, why invest
in a new car today or embark on a capital expenditures program now? With his first two arrows designed to create
a growing economy, boost inflation and foster investment opportunities, Abe is attempting to change this thought
process. This third arrow is designed to create structural changes by reducing regulations and putting incentives in
place to encourage investment. It also includes carefully implementing new tax measures to help reduce the large
debt burden Japan faces without impacting the economic recovery.
Japan has historically had a business environment filled with government restrictions, anti-competitive laws,
bureaucratic interference and inflexibility, and relatively high taxes. While Abe can reduce corporate taxes in a
number of ways and create pro-business reforms, Japan has one of the lowest equivalent consumption taxes in
the developed world. In September 2013, an increase to 8% was approved by the Japanese government. Future
plans may call for increasing this tax to 10% by 2015, depending on how the current increase affects the economy 5 .
Additionally, Abe has personally been in discussion with Japanese corporations asking them to help support
3
3.
4.
5.
Ujikane, Keiko. Otsuma, Mayumi. “Japan’s Abe Unveils 10.3 Trillion Yen Fiscal Stimulus: Economy.” Bloomberg.com, January 2013.
Evans-Pritchard, Ambrose. “Abenomics has worked wonders but can it save Japan?” The Telegraph.co.uk, July 2013.
Reynolds, Isabel. Mogi, Chikako. “Abe Orders Japan’s First Sales-Tax Increase Since ’97: Economy” Bloomberg.com, October 2013.
This information discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed as research
or investment advice. Please see additional disclosures on the last page of this document.
the economic recovery by increasing wages by 1%-2%
Abenomic’s Effect On the
Japanese Markets
annually. In the early 2000s, the last Japanese recovery
before the Financial Crisis, corporate growth did not result
Initial reaction to the first two of Abe’s “Arrows” has been
positive. The markets have responded with the Nikkei 225
posting a 25.5% YTD return (USD) as of 12/31/13.
in pay increases, as corporations were still in a defensive
mode and hoarding cash.
In addition to improving the operating conditions for
structural tax and investment changes for Japanese
citizens. Beginning in January 2014, Japanese citizens are
able to invest up to 5 million yen (approximately $50,000)
over a five-year period on a tax-free basis to encourage
greater equity ownership. Interest in this Nippon
Individual Savings Accounts (NISA) program has been
well received by Japanese citizens thus far and should
Nikkei 225 Closing Price
corporations, Abe is also focused on implementing
18,000
16,000
14,000
12,000
10,000
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2013 2013 2013 2013 2013 2013 2013 2013 2013 2013 2013 2013
provide greater demand for Japanese equities over time.
Year
Source: Bloomberg
Investment Opportunity
Prime Minister Abe’s Monetary and Fiscal Policy appear
to have been successful, and Japan’s stock market
barometer, the Nikkei 225, has responded, posting
25.5% returns in calendar year 2013, and Japan’s GDP
grew by an annualized 1.1% in the third quarter of 2013.
In addition to the initial success, there are other factors
that could propel economic recovery and investment
interest in Japan. The overall level of Japanese equity
ownership by individuals and institutions should
increase over time. Historically, Japanese citizens have
been grossly underweight in stock ownership and instead
overwhelmingly
favored
principal-protected
bank
deposits for their financial assets. Currently only 8% of
Japanese Households’ Asset Allocation
Currently Japanese households hold just 8% of their assets
in equities compared to a roughly 32% U.S. household
equity allocation.
Others Bonds
2%
Investment 4%
Trusts
5%
Shares &
Equities
8%
Insurance &
Pension
Reserves
27%
Currency &
Deposits
54%
roughly $15 trillion in aggregate Japanese household
assets are invested in equities and large institutions
Source: The Bank of Japan, March 2013
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This information discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed as research
or investment advice. Please see additional disclosures on the last page of this document.
Japan White Paper
have similarly low equity exposure in their portfolios. The Japanese government hopes that the NISA accounts
will draw approximately $250 billion into the Japanese equity markets6 , while Nomura Research Institute
estimates that it could be as high as
$690 billion. In addition, a general
Asset Allocation of Overseas Investors
feeling of comfort with an inflationary
Foreign investors are currently under-allocated to the Japanese markets
as compared to the Japanese weighting in the EAFE Benchmark.
environment and a market that has
30%
inflows for the equity markets that will
Japan Exposure in EAFE Benchmark
appreciation potential should create
only strengthen over time.
Portfolio Allocation
25%
21.3%
3.4%
20%
Even foreign investors are underallocated to the Japanese markets
as
compared
to
the
Japanese
weighting in the EAFE benchmark.
15%
17.9%
Average Japan Allocation
This lack of equity exposure creates
an opportunity for a major “great
rotation” out of fixed income and
10%
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Year
Source: Inter Sec, Frank Russell, Goldman Sachs. March 31, 2013.
savings products and into equities
as investors, both institutional and
retail, become more comfortable with
an inflationary environment and a
growing economy in Japan.
Final Thoughts
If Prime Minister Abe is able to enact the structural changes that Japan needs, while wisely implementing
strategic economic stimulus investments, the 2013 market pop created by easy monetary policy should
continue and help fuel a strong Japanese recovery. Abe’s “Three Arrows” appear poised to potentially
lead the Japanese economy to new highs; creating an excellent investment thesis for investors who want
to focus on a geographic region with above-average upside potential.
5
6.
Tsuguo Kohno. “To NISA or not to NISA?” MorganMckinley.co.jp, September, 2013.
This information discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed as research
or investment advice. Please see additional disclosures on the last page of this document.
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About Hennessy Funds
Founded in 1989, Hennessy Funds has a longstanding track record of proven performance and offers a broad range of
mutual funds, with strategies that can play a role in nearly every investor’s portfolio allocation. Our line-up includes
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Hennessy offers two Japanese equity funds, the Hennessy Japan Fund (HJPNX/HJPIX) and the Hennessy Japan Small
Cap Fund (HJPSX), both of which are sub-advised by SPARX Asset Management Co. Ltd. Located in Tokyo, SPARX is
one of the largest and most experienced Asian-based asset management specialists.
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Debt-to-GDP Ratio is a measure of a country’s federal debt in relation to its gross domestic product (GDP). Nikkei is
Japan’s Nikkei 225 Stock Average, commonly used to measure a price-weighted index comprised of Japan’s top 225
blue-chip companies on the Tokyo Stock Exchange. The MSCI EAFE Index (Morgan Stanley Capital International, Europe,
Australasia, Far East) is an index created by Morgan Stanley Capital International (MSCI) that serves as a benchmark of
the performance in major international equity markets as represented by 21 major MSCI indexes from Europe, Australia
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