Japan, the world’s second-largest economy, has for 20 years been an unfashionable area to invest in and therefore largely ignored by investors.
The new Prime Minister, Mr Hatoyama, will not have an easy first 12 months in power. The policies for supporting economic recovery are now emerging after a period when investors have sold the market on the uncertainty the political change represented.
Looking forward to 2010, we can be a lot more confident the drags on growth in 2009 might actually be alleviated, at least to a degree. The strength of the yen has crippled both Japanese manufacturing and also as a consequence, domestic consumption.
Having recently hit a 14 year high versus the US dollar and strengthened by 40% against the Korean won the Japanese currency to us looks overvalued and it is the combination of this higher Yen, coupled with deflation that has meant real interest rates in Japan have been high relative to the rest of the world. This should result in Japan’s first steps towards quantative easing or other countries beginning to tighten their respective monetary policies.
The outlook for long-term valuations across Japan is attractive at the moment, and many companies are trading at below book value, providing excellent opportunities for those managers that know the Japanese management, understand the company strategy and can therefore pick the best medium- to long-term companies to invest in.
Japan’s economy has clearly recovered over the past months but not on the scale it was expected to and remains fragile. At a time when one is paid to be a contrarian investor, particularly in the light of the cyclical sector outperforming, we are focusing on laggard areas such as small cap and quality domestic issues.
James Salter is fund manager of Polar Capital’s Japan fund
