After more than 20 years of stagnant growth and deflation, the Japanese economy has now experienced its longest period of expansion in more than a decade*.
Boosted by strong exports, a pick-up in consumption and investment for the Tokyo Olympics in 2020, Japan grew faster than expected in the first quarter of 2017. The annualised growth rate of 2.2% is the fastest rate for a year, figures released this month show.
But is this translating into better investment opportunities too? According to JP Morgan's Nicholas Weindling, yes. In a recent update, he said he is feeling more positive now than he has done in the 10 years he's been managing the JPM Japan fund, which is on the Chelsea Core Selection.
Nicholas commented: “For once there is political stability in Japan: Abe can stay in power until 2021 and, importantly, the opposition is weak, so he can get his much-needed reforms through.
“Japan is also experiencing the tightest labour market in a quarter of a century.” Unemployment is now just 3% - the lowest rate since 1995. “Wage increases are small but they are starting to appear, and more older and more female workers are joining or rejoining the workforce. Immigration is also increasing in the form of temporary workers from Thailand and China.”
This has a knock-on effect in helping boost household incomes, and consumer and business confidence is improving, creating a virtuous circle. “Japan is changing quickly by their own standards – it's just that it's a slower pace than we are used to in Europe,” he continued.
Japanese companies are also increasingly focusing on creating value for shareholders through better capital allocation. Share buybacks and dividend growth have accelerated sharply following the introduction of 2015’s corporate governance code.
“Recently, we've seen the first company ever finance a share buyback out of debt, taking advantage of low interest rates,” Nicholas said. “This is typically a very US trend, so it demonstrates the changes being undertaken. On that note, the dividend yield in the Japanese market is now the same as the US (as measured by the S&P 500).”
Dan Roberts, manager of Fidelity Global Dividend fund, which is also on the Chelsea Selection, agrees. He believes that Japan has been one of the bright spots of the global economy in recent times and has been adding to his Japanese exposure in the fund for the past 12 months.
“As a dividend investor,” he said, “there are also encouraging signs that attitudes towards shareholders are changing, particularly since the introduction of the corporate governance code, which encourages companies to focus more on capital allocation and creating value for minority shareholders. Since then, dividend growth and the number of share buybacks have accelerated sharply.
Asahi Group, which is the second largest beer brewer in Japan, is an example of a holding in his portfolio. It has stable, defensive earnings thanks to hit product ‘Asahi Super Dry’, which allows it to maintain market share in the beer category. Dividend per share has increased each year since purchase, and Dan expects the current dividend yield of 1.28% to grow over time.
He concluded: “With Japan also home to several other conservatively-managed companies that are leaders within their respective niches, it provides a good opportunity for bottom-up stock pickers. Although headline yields are typically lower than those in the UK or Europe, a combination of high free cash flow levels, a strong macroeconomic backdrop and improving capital allocation supports the outlook for dividend growth from here.”