Last updated: 09:07 / Monday, 13 March 2017
Interview with Kenichi Amaki

Matthews Asia: “Yen Weakness is not a Requirement for Japanese Stocks to Perform Well This Year”

Matthews Asia: “Yen Weakness is not a Requirement for Japanese Stocks to Perform Well This Year”

Regarding the factors that make him optimistic about Japanese equities in 2017, Kenichi Amaki, Lead Manager of the Matthews Japan Fund, notes that over the years, the Japanese economy has faced many macroeconomic headwinds, but this year many of them have turned into tailwinds.

As an example, the fund manager mentions that improved PMIs, the acceleration of wage growth, and the announcement that the Japanese government will expand fiscal spending for the first time in three years, all bode well for the strength of the economy.

And then, he says, we run into inflation. "Japan has been caught up in deflation for most of the past two decades and even I anticipated that after a few years of positive CPI growth, the economy would sink back into deflationary territory. However, given the weakness of the yen, a potentially inflationary environment in the United States and elsewhere, coupled with rising commodity prices, it is time to rethink this. I think that, in all likelihood, inflation may actually accelerate this year."

The other note in this positive context is the yen, although Amaki likes to stress that its weakness is not a requirement for Japanese stock markets to perform well this year, although "it is helpful owing to its effect on corporate earnings." Prior to the US election, the exchange rate ranged from 103-104, "however, I remain skeptical that it will weaken to as low as 125."

He explains that this is how Matthews Asia arrives at the optimistic scenario it envisages for Japan this year: "All these factors, and especially our vision of inflation are good news for Japanese stocks and it is a tailwind that, frankly, we have not had before. It should be supportive of Japanese revenues, trickling down to earnings and eventually to share prices."

For the Matthews Japan Fund manager, the two areas which are likely to benefit greatly are the retail sector and the financial sector. “Japanese retail companies underperformed last year, owing to expectations of a return to deflation and renewed price competition amongst retailers. However with a change in both currency and inflation expectations, those things might be viewed positively for the retail sector,” he anticipated.
Meanwhile, the fund manager points out that yield curves steepened globally, “including in Japan,” which should be positive for Japanese banks and life assurance companies.

In fact, 3 of the top 4 positions of the fund he manages are Japanese financial entities: Mitsubishi UFJ, Tokyo Marine Holdings and Sumimoto Mitsui.

Shinzō Abe Administration

But the question that everyone who is looking for opportunities on the Japanese stock exchange has in mind is: Is Abenomics working?
Shinzo Abe boasts one of the highest approval ratings amongst heads of state worldwide, which is basically another positive factor. Furthermore, the inflows into the stock markets are another reason to be optimistic.

“By the end of October last year, international investors had sold almost two-thirds of what they purchased at the start of ‘Abenomics’. Meanwhile, the Bank of Japan will be buying 6trn yen of Japanese equities annually, while corporate share buybacks have been robust, hitting 5trn yen in 2016, and are expected to continue apace this year,” he explains.

Meanwhile, Amaki adds that domestic pension funds are short of their target allocations for Japan, and goes on to explain that, he estimates that there is likely to be around 10-15trn yen of domestic buying into the asset class this year. “If international investors change their attitude to Japan and decide to up their weightings, it could really propel the market upwards.”

Trump and Car Manufacturers

But of course, as in the rest of the world, the risk for this optimistic scenario is called Trump. Especially for the Japanese automotive industry, which has many interests in the United States

Without going any further, Toyota imports from Mexico only 70,000 units of the 1 and a half million cars it sells in the United States, "it’s a tiny number, but it will still be affected to some extent. All Japanese car manufacturers will be affected," he states.

Therefore, in terms of the fund’s exposure to the United States, Amaki has been reducing the positions of those companies that have US competitors producing in the United States. "Because, if US companies are actually producing in China, they will actually be in the same position as a Japanese company which also imports its parts from China."

“His protectionist policies could have a big negative impact, while any U.S. policy mistakes causing U.S. economic reversal are also a concern.” In this regard, the risk comes from the mix of fiscal incentives envisaged by Trump and the rates hikes of the Federal Reserve, since this could hamper US growth.

“Policy mistakes causing deflationary trends would also be a threat to the global economy and remove all the inflationary tailwinds we discussed earlier.” Amaki adds.

“Such risk scenarios will inflict pain on all of US trade partners, not just Japan.” He concludes.