Joy in Japan
Ian Cowie has something to celebrate at last
Toyota, the world’s biggest car-maker by sales, announced a breakthrough in technology earlier this month that it said could halve the cost, size and weight of batteries for its electric vehicles. This startled rivals and should remind investors of how Japan has an impressive history of commercialising technical innovation to produce growth and income.
Combined with recent financial reforms, strong science and a weak currency have boosted exports and helped the Tokyo stock market soar to its highest level in 33 years. Investment companies bring the world within reach and those focused on Japan have delivered some of the best returns seen in any major market over the last year.
“The six investment companies in the Japan sector achieved average total returns of 15%, while the five in the Japanese Smaller Companies sector averaged 7% over the past 12 months.”
For example, the six investment companies in the Japan sector achieved average total returns of 15%, while the five in the Japanese Smaller Companies sector averaged 7% over the past 12 months. By contrast, the global average for all investment companies during the same period is just 2%.
However, it is important to remember that past performance is not necessarily a guide to the future. History also sounds a note of caution, because Japan’s main stock market index, the Nikkei 225, remains below the peak it briefly hit at the end of 1989.
Back then, the land occupied by the Imperial Palace in Tokyo was said to be worth more than all the real estate in California. Then the bubble burst, causing property and share prices to plunge into a prolonged bear market.
Even seven years of very cheap credit between 1999 and 2006 – sometimes described as the zero interest rate policy (ZIRP) – was not enough to stimulate the economy. Japanese consumers deferred consumption, while investors preferred cash to risk assets because they expected prices to be lower in future.
More recently, deflation has disappeared and fiscal reforms introduced by Japan’s longest-serving prime minister, Shinzo Abe, are beginning to bear fruit. However, it is only fair to add that Abe did not live to see this success, because he was assassinated in July last year.
“Deflation has disappeared and fiscal reforms introduced by Japan’s longest-serving prime minister, Shinzo Abe, are beginning to bear fruit.”
Regulatory reforms, including the Tokyo Stock Exchange requiring listed businesses to prioritise the return of value to shareholders, are continuing the work begun by Abe. Meanwhile, the current prime minister, Fumio Kishida, is helping exports by allowing the yen to weaken against other currencies.
For example, since the start of this year, sterling has strengthened by 18% and the dollar has risen by 10% against the yen. This is making it easier for foreign consumers to buy Japanese goods including TVs and sound systems produced by Panasonic, Sony and Toshiba, plus cars and other vehicles made by Honda, Mitsubishi and Toyota.
Sony is the biggest underlying holding in abrdn Japan Investment Trust (AJIT), which is the second-best performer in its sector over the last year, having delivered total returns of just over 22%. This trust has recently proposed merging with Nippon Active Value Fund. CC Japan Income & Growth Trust (CCJI) was the standout performer over the same period, with a total return of 27%, while Schroder Japan Trust (SJG) comes in third with 19%.
However, you can see how recent this sector’s recovery has been by considering medium-term performance. For example, AJIT’s five-year return is just above 22%, CCJI returned 21% and SJG delivered 23%.
Similarly, Nippon Active Value Fund (NAVF) is the top performer in the Japanese Smaller Companies sector with a total return of nearly 34% over the last year. AVI Japan Opportunity Trust (AJOT) is second, with nearly 16%, while Atlantis Japan Growth Fund (AJG) is third, with 7.5 per cent. NAVF and AJOT lack five-year records - having been launched in February 2020 and October 2018 respectively – while AJG is nearly 10% down over five years.
Your humble correspondent has been a shareholder in Baillie Gifford Shin Nippon (BGS) for more than a decade and has personal experience of the pain and pleasure this entailed. For example, according to independent statisticians Morningstar, the total returns from BGS over the last year, five years and ten years are minus 2%, minus 25% and plus 133% respectively.
No wonder many British investors have shunned Japan in recent years. But, as mentioned earlier, past performance is not necessarily a guide to the future.
This country has several world-class companies in sectors including electronics and motor manufacturing. Its ageing population – where 29% of the total are 65 years or older – has encouraged innovation in robotics and artificial intelligence (AI).
To return to where we began, some experts say Toyota’s new technology might solve electric vehicles’ battery problems such as charging time, capacity and the risk of catching fire. While pessimists fear another false dawn in the Land of the Rising Sun, optimists could consider some exposure to an economy that has languished for decades but where the long-term recovery may have only just begun.
Ian Cowie is a shareholder in Baillie Gifford Shin Nippon as part of a globally diversified portfolio of investment companies and other shares.
