Japan remains cheap and companies are huge profitable despite the meteoric rise of the market over 2013, according to Citywire AA-rated manager Mark Davids.
He told Citywire Global: 'Last year the Japanese market was the only one in the world to keep revising its earnings estimates upwards so despite the rise, Japan did not get expensive because of the constant re-ratings.'
Davids admits measures so far put forward in Prime Minister Abe's ‘third arrow’ of reform have disappointed and he is looking to May or June for Abe to reveal his next tranche of structural and economic initiatives.
He said: 'What we have heard so far has been underwhelming even though the commitment to Trans-Pacific Partnership (TPP) talks has been impressive given the powerful land lobby against it in Japan.'
'But proposals for corporates to buy farmland and corporate tax rate rises have not happened yet, while another disappointment has been proposals to deregulate pharmaceutical sales with no shortage of drugs companies trying to block change.’
Labour laws conundrum
Davids said labour reform will be a critical part of Japan's continuing economic progress, with Abe vowing to update the country's archaic labour laws where many corporate employees effectively have a job for life.
'It remains hard to sack people and a slightly more open approach to immigration might also help, although we may be seeing a more relaxed approach for SE Asian workers starting to come through.'
Davids is also still awaiting progress on the creation of specialist economic zones, with Greater Tokyo rumoured to be one, although firm details are yet to be established.
Despite his disappointment at many ‘third arrow’ policies failing to materialise as yet, Davids insists, in the short term at least, the Japanese recovery story hinges on Abe's 2% inflation target being successful and Japan's consumers getting back into the spending habit.
'Third arrow policies hitting home would be nice, but as long as Japan continues to reflate, it could lead to a real change in consumer attitudes.’’
‘CPI inflation has crept up to 1.4% and core inflation is up to 0.8% with real interest rates now negative. If that continues we will see a meaningful swing in consumer behaviour.'
The currency too has been a critical part of the inflation story.
'Weakening the yen has made Japan's exporters more competitive, contributing to inflation and giving greater operational gearing to Japanese companies.'
One crucial factor in Japan's recovery will be real wage growth, with Davids eyeing the next round of negotiations between corporates and the unions in March.
'People have not really felt better off yet as regular wages have not gone up, but we may see progress in March.'
Over the three years to the end of January 2013, Davids has returned 64% compared to 55.3% by the average manager in yen terms over the same period.