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Japan’s growth grind: top managers on contraction concerns

Japan’s growth grind: top managers on contraction concerns

The contraction of the Japanese economy revealed in the country’s second-quarter figures has not derailed the efforts being enacted under Abenomics, leading fund managers have said.

The latest Cabinet Office data indicated the biggest contraction in annualised growth since the earthquake and tsunami which hit the country in 2011.

This most recent decline has been attributed to the hike in the country’s sales tax, which rose from 5% to 8% in April under Prime Minister Shinzo Abe’s ambitious economic stimulus efforts and reforms, known as Abenomics.

With markets expecting a slowdown driven by the tax hike, how much do the latest growth figures impact fund managers operating in the country, and is there any cause for concern?

Here Citywire Global has collated the insights of leading Japanese equity managers to uncover the true extent of the slowdown.

Restructuring requirement

According to Chern Kwok-Yeh, head of Japanese equities at Aberdeen Asset Management, the correction was well telegraphed by markets and viewed as a necessary evil for structural reform to take hold.

‘Ahead of the increase in the sales tax in April there was concern that it may derail the economic recovery. The latest figures suggest that policymakers may need to step in to stimulate the economy.

‘Yet the quandary is the country has a huge debt mountain and revenue raising is a priority. It is not as if the sales tax is especially high relative to other countries.

‘For growth to be sustainable, Abe has to deliver on his promise to restructure the country’s uncompetitive industries and progress on that front has stalled too.

‘It’s a reflection of the difficulties he faces in prising open protected industries and changing corporate Japan’s mind-set. That said the country continues to be home to some good quality companies that despite the macro headwinds are performing well.’

Builds up efforts to tackle debt burden

Ian Heslop, Citywire AA-rated manager at Old Mutual, said investors were braced for a slowdown while Abe can now focus on getting the countries debt dynamics under control.

‘We saw quite a significant jump in the Q1 numbers with some people getting ahead of the sales tax rise. We are now seeing the impact of the sales tax but also a significant amount of demand taken by Q1 from Q2. Having said that, it wasn’t unexpected and the correction was less than some people expected.

‘In terms of the sales tax hike, what we would not consider a very large increase of 3%, particularly when you look at the UK where it is 20%, it doesn’t appear to be too significant a move. Abe has said he will move this again to 10% and it is all part of making the debt burden more manageable.

‘We are always expecting some measure of volatility as we work with, what is essentially, unprecedented economic policy. The first two arrows have hit home and the third arrow, which is restructuring, is coming into effect and he is starting to make the right noises here.

‘You could say the fourth arrow is managing the debt burden, which the sales tax is intended to help with. Abe has said what tax revenues would be recycled back into the economy, so it would be neutral but we can expect impact for consumers in the short and mid-term.’

Blip, not a bubble bursting

The slowdown is headline-grabbing but Andrew Rose, Citywire A-rated manager at Schroders, expects a strong return to form over the next quarter.

‘Whilst undeniably weak and significantly worse that the quarter immediately following the last consumption tax increase in 1997, although the degree of front loaded demand was also lower at that time, the rate of decline was slightly ahead of consensus expectations.

‘Central to the decline was the “payback” from the front loaded demand that occurred during the first quarter of this year to beat the 3% increase in the consumption tax on April 1st. Not surprisingly, therefore, the weakest areas were private demand components of GDP such as private consumption and housing investment, i.e. where sensitivity to the tax increase was highest.

‘Whilst the dislocations caused by the tax increase render it difficult to gauge the underlying strength of the economy, it seems reasonable to expect growth to resume in the third quarter.

‘Some of the data surrounding consumption post the end June cut off for second quarter GDP is more encouraging, survey data surrounding private capital spending is indicative of a rebound and exports are finally showing some signs of responding to the currency’s weakness over the last 18 months.

Rear view won’t aid investors

The use of growth figures is always backwards looking and does not reflect the strong strides being made in many sectors, Comgest’s Citywire A-rated manager Richard Kaye said.

‘I would agree that the decline was well forecast and the use of GDP figures in Japan is a largely rear view mirror look at performance. It is not the best prism through which adjudge development on a continual basis.

‘I have just come back from a five week stay in Japan and while I was there I met with 50-60 companies, which gave me an insight into quite significant developments. Many of which we think will continue to grow the Japanese economy.

‘For example, we met with many manufacturing companies and there are considerable amounts of upgrades going on in manufacturing equipment. This is true across small companies, domestic companies, large manufacturers and so on.

‘In some cases they are upgrading for the first time since the Lehman’s crisis, so we are talking about upgrading 10-year-old equipment, while others have not had upgrades for 15 years.

'Whether this is triggered by Abenomics or wider global growth is up for debate but the fact is these upgrades will help drive growth and development for several quarters to come.’

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