Firstly ‘the tourists’ have gone. Well, not tourists in the traditional sense. I’m referring to the foreign investors who flooded the Japanese equity market on the back of the hype of ‘Abenomics’. The past 18 months have seen the biggest flight from Japanese equities by foreign investors since 1987. But the good news is that the locals have stepped up. The domestic institutional asset managers, pension funds, local insurance companies as well as retail investors are now net buyers of Japanese equities – the first time this has occurred in the past 20 years. Both the government and private pension/super funds and insurance companies are increasing their weighting of local equities, in some cases to over 20 per cent.
Why is this occurring? Prime Minister Shinzo Abe and the Bank of Japan (BOJ) are committed to an expansive fiscal policy, whereby 1 per cent of GDP over the next year has been reserved to buy Japanese equities. Currently, the BOJ owns about 4 per cent of the local market and by this time next year they will potentially own around 6 per cent. Further, the BOJ is anchoring the ten-year bond yield at zero. Let’s repeat that again – ten year rates anchored at zero. The local Japanese institutional investors have seen rates go from 5 per cent down into negative territory and, importantly, what are they managing? Long dated liabilities, which need to matched with appropriate assets so they are turning to equities in order to manage their assets and liabilities.
Secondly, there has been a revolution in corporate culture. Japan used to be perceived as a corporate club. However, change is occurring with a new corporate governance and stewardship code having been implemented by the government and, for the first time in the Japanese equity market history, we are seeing a focus on shareholder returns, especially through the payment of dividends. A dividend stream was virtually non-existent in the Japanese share market up until recently, and now we see the Topix (benchmark index for Japan) paying out a yield of ~2 per cent. Still a way to go for improving corporate culture, but there have been positive developments in this area.
Thirdly, political stability. Mr Abe presides over a stable government with a massive two-thirds majority in Parliament, creating a strong and well-coordinated government. Mr Abe was the first global leader to meet US President Donald Trump in what was clearly a positive sign for Japanese-US financial and economic relations. Throughout the election build-up, team Trump signalled an agenda to boost and build new infrastructure projects in the US. Think new ports, motorways, airports, bullet trains. Japan could well be a major beneficiary of this program via projects built in the US, but with Japanese know-how.
Lastly, theory suggests a benefit in being currency hedged when investing in Japan. Remember what the BOJ is trying to do? It wants a weaker yen against the USD and is doing what it can to achieve this. History has shown that a strong performance in the Japanese equities market is often accompanied by a weakening yen (due to the importance of exports to the market). By investing on a currency hedged basis, you essentially remove the currency risk, so that a weakening yen should not detract from the equity returns when converted to AUD.
How does an investor get currency hedged exposure to the Japanese share market? One way to obtain such an exposure is through an exchange traded fund which provides currency hedged exposure to dividend paying, globally competitive Japanese companies.
David Whitby, account manager, Betashares