A taste of bling in Japan
Gold flakes on ice cream – that was what Charles Beazley, Chairman, President & CEO at Nikko Asset Management, ate at a Japanese restaurant recently. The opulent dessert may be an indication the Japanese are starting to feel better again as Abenomics powers on. Early indications show that all is going well. “What a difference six months can make.
“A lot of it is very hopeful. There are some very subtle shifts that are taking place in terms of asset reallocation in Japan,” he adds. “The rate of both subscriptions and redemptions are growing …. People tend to take profit and that’s going into money funds, and the subscriptions are increasingly taking on more risks.”
Prime Minister Shinzo Abe’s economic programme, known as “Abenomics,” includes advocating an inflation target at 2% a year, halting excessive yen appreciation and introducing radical quantitative easing. Bank of Japan’s new Governor Haruhiko Kuroda has vowed to take unprecedented monetary stimulus, to double the money base within two years to battle deflation and jolt the economy out of its prolonged slump.
Without any doubt, Japan has the largest cash deposit in the world. With the currency hedge coming off, Japanese investors are showing more interest in equities and REITS. But there won’t be a swarm of money coming out of the country as some has feared, Beazley says. “The idea of retail investors just suddenly taking money out of deposits and giving it to European bond markets is just silly …. We’re not seeing it.”
Japanese corporations typically have hoarded cash. “The liberation of cash in Japan, if it starts to move, will have an impact,” he adds. “But Japan has been exporting its capital for some time. There’s very little opportunity at home, the banks have got very large growth in deposits, they have anemic growth rates and the exporting of Japanese capital is a feature from financial institutions as well as retail.”
And Abenomics has led to a surge in domestic confidence. The de-emphasis on deposits and the de-emphasis of safety in cash are changing the way people think. “It’s injecting a sense of realism and pragmatism … these are difficult decisions but even the bureaucrats themselves are saying ‘we’ve got to do this’. There has been a sense of diminishment that has taken place in Japan,” he says. “You have to see Abe in a more political context … Abe-san has won a gigantic political deposit from the electorate.”
The 2% inflation target is just a slogan and Abe’s objective is to end deflation. “Support for this political approach is almost Regan or Thatcher-like. He’s saying ‘we cannot afford to be left behind’ and this is a very powerful message to Japan,” Beazley adds. “This is a politically-inspired move not just an economic one … Japan has just been catching up.”
The rest of the world actually needs Japan in Asia to succeed, Beazley says. “We all need the politicians to deliver. Abe with his approval ratings, in the next three years, has a better shot of delivering than the Europeans politicians. Even Obama’s limits have been exposed.”
Global allocators, which have typically been underweight on Japan, may be in for an uncomfortable ride for much of this year. “It’s like a positive black swan, sort of ‘why did you not see that one’.
“It’s a real conundrum for them, for their commercial risks. To be underweight for Japan will bring some real pain by the end of the year,” he adds. Allocators are now scrambling to decide on the best approach when it comes to Japan.
“We’re seeing three waves. The first wave is the fast money that moves in very, very quickly to establish their positions, the early long managers, the hedge funds and the trading arms of the banks … The second wave is the retail involvement in Japan and that’s supporting the markets now. Retail share for the TSE trading volume used to be 16% and it’s now 36%. Month-on-month applications for stock seminars are going through the roof, month-on-month brokerage accounts being opened are going up.
“We’re now getting a cheque every single day into our Japanese mutual funds, it’s positive flows every day. So there’s no question that Japan is beginning to move into its own market.”
Japan isn’t alone with its objectives to stimulate domestic demand and making the changes that are supportive of its economic targets. “We’re sitting here thinking we’re not completely divorced from the rest of the world. There’s a very close linkage. Japan could have quite a setback, depending on the global markets, in the next 3-5 months and that would be an excellent buying opportunity for an investor.”
The bigger market in Asia for investors right now is Japan. “Japan is very cautious, it’s deeply conservative but it’s quite progressive. It’s going through one of those ‘feeling quite a lot better about myself’ phase.
“We genuinely think this is profound and it’s important the world understand that this is changing. This time, we’re saying very nosily that things are very different.”