The need to enshrine large structural reforms within law means the third arrow of Abenomics will take years to land, according to Euro Stars AA-rated manager Ernst Glanzmann.
Speaking to Citywire Global, Glanzmann, who co-runs the Julius Baer EF Japan fund, said proposed changes to healthcare, labour, energy and industry would all be subject to a lengthy legal process.
Glanzmann said, despite the historic rise in Japanese markets since the onset of the aggressive monetary policy, means the longer-lasting effect of the measures have yet to be fully realised.
‘Abenomics will only really play out in the coming years. This is a strategy with parliamentary processes behind it, so laws have to be formed and ratified and all these processes mean it will be three to four years before ‘Abenomics’ – as intended – really starts to take hold.’
‘At the moment, the government has tabled a large number of sectors and aspects they want to reform but we expect that to be cut down, as not all of them will be able to be pushed through.’
Structural reform, which is largely viewed as the third pillar of Prime Minister Abe’s policy alongside monetary and fiscal measures, has come under scrutiny in recent weeks as the most likely of the three strategies to face difficulties.
Renowned economist George Magnus said the third arrow would prove the most difficult and potentially jeopardised Abenomics as a whole, while Aberdeen Asset Management’s Chern-Yeh Kwok highlighted how intricate an issue it is.
Upper House elections
One key aspect which could decide the success of the third arrow, Glanzmann said, will be the elections in the Upper House of the Diet in July of this year.
‘There is a strong possibility the LDP – Abe’s party – will have a strong position in the upper house as well and this would allow laws to be passed much easier by the government,’ he said. ‘According to polling surveys it looks likely the LDP will get this majority.’
While the success or failure of Abenomics will have a long term impact on the Japanese equity market, Glanzmann is confident he can locate secular growth opportunities in the region.
The fund operates a blend approach of Glanzmann’s diamond strategy – a concentrated portfolio of market leaders – with a systematic base of broader stocks compiled by Carlo Capaul and Stefan Frohlich.
Within Glanzmann’s part of the fund, the Zurich-based manager has made two significant changes over the quarter. This included selling out of water treatment firm Kurita Water, due to sluggish sales, and pharmaceutical name Hisamitsu Pharma, based on it having FDA approval blocked.
Meanwhile, Glanzmann has taken a position in Yahoo Japan – which is increasing market share – as well as manufacturing company Misumi Group, which has seen profits grow due to overseas expansion.
The Julius Baer EF Japan-JPY C returned 30.33% in the three years to the end of April 2013. This is compared to its Citywire benchmark, the Topix TR, which rose 26.24% over the same period.