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Japan White Paper
Japan’s Rising Opportunity
Following his election to Prime Minister in 2012, Shinzo Abe and his Liberal Democratic Party
have implemented sweeping changes in Japan referred to as “Three Arrows” of “Abenomics.”
This three-pronged economic reform effort was targeted at reversing almost two decades of slow
growth and deflation in the world’s third largest economy. With positive developments underway,
we believe Japanese stocks hold considerable potential for investors over 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 a superior
example for all companies and leaders. 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 deflation. Despite
lasting more than 20 years, this time period has been referred to as the “Lost Decade.”
Japan is in the midst of turning its economic fortunes around. In December 2014, Shinzo Abe
was reelected Prime Minister in a landslide victory, which secures up to four more years of a
stable political environment and gives the government time to implement his “Three Arrows”
program. Through a combination of monetary and fiscal policies and structural changes
designed to reduce regulations and stimulate private business growth, Abe could lead Japan
and its economy into a sustained 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.
Abenomics’ Effect On the
Japanese Markets
“The Three Arrows”
Prime Minister Abe’s reform plan focuses on reviving
The markets’ reaction to Abe’s “Arrows” has been
positive, with the Nikkei 225 increasing 74% in yen
terms (25% US$) from 1/1/13 through 12/31/14.
GDP growth and increasing inflation to 2% in the shortterm, and, over the longer term, setting Japan on a path
of sustainable economic growth. To accomplish these
1. Monetary easing policy
2. Large-scale fiscal stimulus measures
3. Structural reforms
Nikkei 225 Closing Price
goals, Abe has implemented a three-pronged approach:
18,000
I. Monetary Policy
16,000
14,000
12,000
10,000
Jan
2013
May
2013
Sept
2013
Jan
2014
Year
The first of the “Three Arrows” was implemented
May
2014
Sept
2014
Dec
2014
Source: Bloomberg
in 2013 and focused on monetary policy, which the
Tokyo Stock Exchange Market Cap
Bank of Japan (BOJ) had stated should be “aimed at
achieving price stability, thereby contributing to the
sound development of the national economy.”1 By
the end of 2014, Prime Minister Abe and the BOJ had
launched two aggressive Quantitative Easing (QE)
Over the past few years, Japanese companies
have seen significant growth, with the Tokyo Stock
Exchange nearly returning to its 1989 peak.
6
5
2013, with the BOJ making asset purchases of 60-70
4
trillion yen (approximately $500 billion USD) per year.
2
The second tranche of QE began in November 2014, as
the BOJ increased the purchase of assets to an annual
Trillion US$
programs. The first QE program was launched in April
3
2
80 trillion yen (approximately $670 billion USD).3 While
1
these programs are similar to the Federal Reserve’s
0
quantitative easing policy, the BOJ is buying exchange-
1980
traded funds (ETFs) and real estate investment trusts
$162 Bil
1990
2000
2010
2015
Year
Source: Tokyo Stock Exchange as of April 30, 2015
(REITs) in addition to government bonds.
The goal of the asset purchases is twofold: stimulate
prices across all asset classes and, more importantly,
devalue the yen. Japan’s economy is so export-driven,
the cheaper the yen is for other countries, the more
attractive Japanese products are to foreigners, providing
the potential for significant economic growth. A weaker
yen also indirectly benefits smaller and more domesticfocused Japanese companies.
2
1.
2.
3.
Bank of Japan, “The ‘Price Stability Target’ under the Framework for the Conduct of Monetary Policy,” January 22, 2013.
Bank of Japan, “Introductions of the ‘Quantitative and Qualitative Monetary Easing,’” April 2013.
Bank of Japan, “Expansion of the Quantitative and Qualitative Monetary Easing,” October 31, 2014.
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
yen (about $32 billion USD). Another 3 trillion yen ($26
Reversing Stagnant GDP Growth
billion USD) was used to stimulate private investment
Creating sustainable economic growth is a longterm commitment for Prime Minister Abe.
increase GDP by 2% annually and help create 600,000
new jobs.4 Of course, Abe and his advisors must walk a
3
GDP Quarterly % Change
and other measures. The goal of this stimulus was to
fine line, as this stimulus package will leave Japan with
2
approximately 245% debt to GDP ratio.5 Abe himself has
1
talked about carefully avoiding “pork-barrel” projects
0
which could undermine the market’s confidence in the
-1
desired outcomes for the stimulus measures. However
-2
Earthquake
Sales Tax
Increase
-3
-4
March
2009
March
2010
March
2011
March
2012
March
2013
March
2014
March
2015
with careful planning and strategic investment, this
economic stimulus could help to kick start the next
wave of Japanese economic prosperity.
The first two arrows have been successful thus far.
Year
Source: Bloomberg
With Japan’s population of 127 million, rising domestic
consumption is also important to what the BOJ considers
the “sound development of the national economy.”
We anticipate export-oriented companies will create
a positive economic growth cycle of boosting capital
investment, thereby bringing manufacturing back
to Japan, leading to hiring more workers and higher
wages, which could result in increased consumption. As
business sentiment improves and capital expenditures
rise, we anticipate a domestic demand recovery.
II. Fiscal Policy
To stimulate private investment, the second of Abe’s
“Three Arrows” included injecting 10 trillion yen
(roughly $87 billion USD) into the Japanese economy
through infrastructure investment, disaster recovery
and rebuilding. Following the devastating Tsunami
and nuclear fallout in March 2011, disaster relief and
rebuilding Japan accounted for approximately 4 trillion
Monetary easing and fiscal stimulus have led to an
increase in inflation as well as yen depreciation. From
the beginning of January 2013 through December 2014,
the yen has depreciated approximately 40% compared
to the U.S. dollar.6 As a result, exports grew 17% over
the previous year as of January 2015.
“We anticipate export-oriented
companies will create a positive
economic growth cycle of boosting
capital investment, thereby bringing
manufacturing back to Japan,
leading to hiring more workers and
higher wages, which could result in
increased consumption.”
Prior to the depreciation of the yen, Japanese exporters
were profitable as they cut costs and streamlined
operations. Therefore, the weakened yen propelled
3
4. Ujikane, Keiko. Otsuma, Mayumi. “Japan’s Abe Unveils 10.3 Trillion Yen Fiscal Stimulus: Economy.” Bloomberg.com, January 2013.
5. Evans-Pritchard, Ambrose. “Abenomics has worked wonders but can it save Japan?” The Telegraph.co.uk, July 2013.
6.Bloomberg.
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.
companies to all-time high earnings. In fiscal 2013 and
on a long-term path to growth. Abe’s structural reforms
2014, corporate profits increased by roughly 80%; if the
include the following initiatives:
yen stabilizes at its January 2015 level, earnings per
share may grow in fiscal 2015. However, the market did
not increase proportionally with earnings, which may
leave room for stocks to move considerably higher.
Japanese exporters have begun spending this increased
cash flow on research and development and capital
expenditures. We believe this capital deployment should
strengthen the competitive edge and global market
share for these companies, with positive momentum
filtering through the domestic economy.
III. Structural Changes
1. Reducing regulations to create a more
business-friendly environment
2. Cutting corporate taxes from above 35% to
below 30%
3. Increasing the number ofworkers by attracting
women and retirees back to the workforce
4. Encouraging stock investment and improved
corporate governance
One of the most market-friendly changes that is expected
to spur Japanese equity ownership levels relates to
Japan’s Government Pension Investment Fund (GPIF),
the world’s largest pension fund. In late October 2014,
Japan has been stuck in an almost two-decade long
the GPIF, which holds $1.2 trillion in assets, adjusted its
deflationary “supercycle,” which has had a major impact
asset mix to increase its exposure to Japanese stocks
on how consumers and corporations view spending
from 12% to 25%. We anticipate other Japanese public
and investing. If prices are going to be lower next year,
and private pension funds will follow suit.
why invest in a new car today or embark on a capital
expenditure program now? The country’s corporate
environment and aging population has exacerbated its
economic situation. Businesses have been burdened
with government restrictions, anti-competitive laws,
bureaucratic interference and inflexibility, and relatively
high taxes. Japan’s aging population means the workforce
is shrinking: In 2013, the labor force was comprised of
66 of the 127 million total population. By 2050, the labor
population is expected to shrink to 44 million.7
An additional initiative addresses return on equity
(ROE). Japanese stocks have had “famously poor ROE,”
as Reuters puts it, with companies returning a net 8.6
cents on each dollar of shareholders’ equity compared
to U.S. companies that have returned a net 15.1 cents.8 To
change corporations’ defensive, cash hoarding mindset,
the JPX-Nikkei Index 400 was launched in 2014. The JPXNikkei includes companies focused on returning capital
to shareholders, becoming more shareholder friendly by
being more cognizant about allocating capital, buying
To overcome these significant long-term growth
back shares and issuing dividends. With the creation of
challenges, Prime Minister Abe has committed to an
this index, Abe aims to change the fact that companies
ambitious economic revitalization plan that is focused
have “squirrelled away cash while producing too-low
returns on equity,” according to the Financial Times.9
4
7.
8.
9. International Labour Organization, Key Indicators of the Labour Market database, The World Bank, and “Global Japan: 2050 Simulations and Strategies,” Keidanren the 21st Century Public Policy Institute, 2012.
Tomisawa, Ayai. “JPX-Nikkei 400 futures debut amid growing ROE interest,” Reuters. November 25, 2014.
McLannahan, Ben. “Japan groups take a shine to JPX-Nikkei 400 index,” Financial Times. June 15, 2014. c
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
Abe has taken a strong stance toward improving
may invest up to 5 million yen (approximately $42,000)
corporate governance to strengthen companies’ earning
up to 10 years on a tax-free basis. Interest in this Nippon
power. In 2014, the Japan Stewardship Code was
Individual Savings Accounts (NISA) program has been
implemented with the goal to promote “sustainable
well received by Japanese citizens as NISA has grown to
growth of companies through investment and dialogue.”
8.2 million accounts with $25 billion invested as of the
The set of guidelines has provided a code of conduct
end of December 2014.10
for institutional investors, outlining how to engage
in constructive dialogue with public companies to
improve shareholder returns. The GPIF, along with over
100 domestic and foreign institutional investors, have
adopted and agreed to follow the Stewardship Code and
should allocate funds to managers who follow this lead.
Because these structural changes are multi-year
initiatives, patience will be required. It may be difficult
to evaluate the effectiveness of the third arrow over the
short term, yet the government’s commitment to longterm economic growth appears strong.
Structural tax changes for Japanese citizens have
also been implemented to encourage greater equity
ownership. Beginning in January 2014, Japanese citizens
Japan’s Largest Pension Fund Increases17.9%
Exposure to Domestic Stocks
Japan’s Government Pension Investment Fund has shifted its bond-heavy portfolio in favor of equities.
Short-term Assets
Portfolio Allocation
100%
Foreign Stocks
80%
Foreign Bonds
60%
Domestic Stocks
40%
20%
0%
Domestic Bonds
End of June
Previous Target
New Target
Source: Government Pension Investment Fund
The Wall Street Journal, October 31, 2014
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10. “NISA investments swell but still not on pace to reach target,” The Japan Times, March 12, 2015.
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.
Investment Opportunity
equity markets11. An aging population in Japan could
Additional factors could propel economic recovery and
may be less adverse to stocks. As economic sentiment
investment interest in Japan. We believe 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 have overwhelmingly favored
spur a transfer of wealth to younger generations who
improves over time, a general feeling of comfort with an
inflationary environment and a market with appreciation
potential should create inflows for the equity markets
that we believe will strengthen over time.
principal-protected bank deposits for their financial
Foreign investors have also been historically under-
assets. As of December 2014, the Bank of Japan reports
allocated to the Japanese markets, compared to the
that approximately 9.4% of 1,654 trillion yen (roughly
Japanese weighting in the EAFE benchmark. This lack
$14 trillion) in aggregate Japanese household assets are
of equity exposure creates an opportunity for a major
invested in equities, compared to a 33% equity allocation
“great rotation” out of fixed income and savings products
held by U.S. households. Japanese large institutions
and into equities as investors, both institutional and
have similarly low equity exposure in their portfolios.
retail, become more comfortable with an inflationary
The Japanese government hopes that the NISA accounts
environment and a growing economy in Japan.
will draw approximately $210 billion into the Japanese
Japanese Households’ Asset Allocation
Asset Allocation of Overseas Investors
Currently Japanese households hold just 9% of
their assets in equities.
Foreign investors have historically under-allocated
to the Japanese markets compared to the Japanese
weighting in the EAFE Benchmark.
Others Bonds
2%
Investment 4%
Trusts
5%
Shares &
Equities
9%
Currency &
Deposits
53%
Portfolio Allocation
Insurance &
Pension
Reserves
27%
30%
Japan Exposure in EAFE Benchmark
25%
21.3%
20%
15%
17.9%
Average Japan Allocation
10%
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Year
Source: The Bank of Japan, December 2014
Source: Inter Sec, Frank Russell, Goldman Sachs. March 31, 2013.
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11. 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.
Japan White Paper
Final Thoughts
As Prime Minister Abe enacts his planned structural changes and continues to implement the strategic
economic and fiscal stimulus measures, we believe the Japanese market should continue to react
positively and consumers and businesses should gain confidence, helping to fuel a strong Japanese
recovery. Abe’s “Three Arrows” may 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.
About The Authors
Masakazu Takeda, CFA, CMA*
Portfolio Manager
Japan Fund
Masa has been Portfolio Manager of the Hennessy Japan Fund since 2006, and has been an analyst and fund
manager with SPARX since 1999. Prior to joining SPARX, he was employed by the Long Term Credit Bank of Japan
(currently Shinsei Bank) and LTCB Warburg (now UBS Securities).
Masa received a Bachelor’s degree in Liberal Arts from the International Christian University.
Tadahiro Fujimura, CFA, CMA*
Portfolio Manager
Japan Small Cap Fund
Tad joined SPARX Asset Management in 1999 and has been Portfolio Manager of the Hennessy Japan Small Cap Fund
since its inception. He acts as head of Traditional Strategies at SPARX and is responsible for overseeing Japanese
mid- and small cap-strategies. Prior to joining SPARX, he was Chief Portfolio Manager of the small cap investment
team at Nikko Investment Trust & Management (currently Nikko Asset Management).
Tad received a Bachelor’s degree in Economics from Tsukuba University and an MBA from the Wharton School,
University of Pennsylvania.
*“CMA” designates Chartered Member of the Security Analysts Association of Japan.
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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.
hennessyfunds.com
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
traditional equity, specialty category and sector funds, as well as more conservative balanced and fixed income
products. Each of the Hennessy Funds employs a consistent and repeatable investment process, combining timetested stock selection strategies with a highly disciplined, team-managed approach. Our goal is to provide products
that investors can have confidence in, knowing their money is invested as promised, with their best interest in mind.
Hennessy offers two Japanese equity funds, the Hennessy Japan Fund (HJPNX/HJPIX) and the Hennessy Japan Small
Cap Fund (HJPSX/HJSIX), 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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Mutual fund investing involves risk; Principal loss is possible. The Funds may invest in small and medium capitalized
companies, which may have more limited liquidity and greater price volatility than large capitalization companies.
The Funds invest in the stocks of companies operating in Japan; single-country funds may be subject to a higher
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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). Earnings per
share (EPS) is a company’s profit divided by its number of common outstanding shares. Cash flow can be used as an
indication of a company’s financial strength and represents earnings before depreciation, amortization, and non-cash
charges. Return on equity (ROE) is the amount of net income returned as a percentage of a shareholder’s equity. 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. Tokyo Stock Exchange is the largest stock exchange in Japan.
The exchange has more than 2,200 listed companies, making it the third-largest in the world by this measure. 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 and Southeast Asia. JPX-Nikkei Index 400 is composed
of 400 companies with high appeal for investors, which meet requirements of global investment standards, such as
efficient use of capital and investor-focused management perspectives. The index was jointly developed by Nikkei,
Japan Exchange Group and Tokyo Stock Exchange. One cannot invest directly in an index.
07/15
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